What is Invoice Financing?
It is a form of short term borrowing for your business, using the value of your unpaid invoices as security for the lender. Invoice Financing provides you with to up to 95% of the value of your unpaid invoices, helping to ease cash-flow burdens.
There are two main types of invoice finance to choose from namely invoice factoring and invoice discounting. The key difference is whether your business manages the collection of outstanding payments from your customers (invoice discounting) or whether the invoice financier takes care of it (invoice factoring).
What is Invoice Factoring?
The lender buys your outstanding invoice for a typical fee of between 0.5% and 5% of the invoice value and then manages your sales ledger, collecting payment from your customer. Your customer will be aware that your business is using invoice factoring. A key benefit, aside from that of cash-flow, is that chasing outstanding invoices will be handled by a third party, which can certainly be appealing for businesses that either do not have the resources to chase payments or would be better off utilising those resources in other areas of the business. One customer we spoke to explained that the fee charged by invoice factoring companies is far more cost effective than employing somebody in an accounts role.
What is the process for invoice factoring?
- The factoring company buys your unpaid invoices at a discount and for a percentage.
- They collect payment of your unpaid invoices from your clients.
- Once the invoice has been settled, the balance is paid to you minus the factoring company’s fee
What is Invoice Discounting?
Is a more discreet method of accessing cash tied up in unpaid/outstanding invoices as your business handles the collection of client payments. Your business can receive funds within 24 hours. Invoice discounting may be more appealing to larger companies who wish to be discreet about invoice financing and/or who already employ an accounts department.
What is the process for invoice discounting?
- Send your invoice to the customer as usual
- The invoice financier pays you a pre-agreed percentage of the invoice, typically up to 90% but sometimes up to 95%, minus the lender’s fee.
- Your business handles the collecting of payment from your client.
- Your business repays the financier the borrowed amount