Invoice Financing

Invoice financing is a method of borrowing funds against outstanding invoices due from your customers. Invoice finance improves business performance because having regular and flexible cashflow will enormously help the growth of your business. Instant funding will enable you to reinvest in operations, and allows timely payment of salaries to staff and suppliers etc.

It also helps alleviate the frustrating waiting times when your clients delay paying invoices until the payment terms deadline is up. Business financing provides an alternative source of funding that helps to resolve matters when dealing with difficult customers who pay invoices late (after terms).

It is a structured product which ensures your customers are unaware that your invoices are financed through an external source.

Invoice Factoring

As a structured financing product, invoice factoring has become prominent in the last few years amongst UK businesses. Factoring is where a business sells its invoices to a third party and then the factoring company controls the sales ledger and collects the debts. The lender or factoring company pays back between 70% – 85% to you on outstanding invoices. Typically, payments are received quicker than ordinary financial arrangements from banks and other financial organisations.

The process of invoice factoring:

  • Invoice your Customer
  • Factor your invoices
  • Receive between 70% - 85% of the invoice value
  • When customers pay your invoices, the Factoring company is paid
  • You will receive the balance after fees

Invoice Discounting

Invoice discounting is a similar product to invoice factoring, it’s a way of drawing money from your ledger against the invoices you have issued. However, the difference is that you will remain in control over the administration of your sales ledger.

The process of invoice discounting

  • Invoice your customer
  • Send invoices to the finance company
  • Finance company decides how much to lend based on your invoices
  • The Finance Company advances your funds
  • You pay the finance company the amount advanced and the fees

Effective Credit Control

Whilst using invoice discounting is an effective way to maintain a regular cash flow, it is reliant on the basis that your customers pay your invoices to terms. The use of effective credit control procedures and practises is imperative to ensure your customers pay you on time. To ensure you maintain a regular cash-flow, you can choose to perform credit control duties in-house or you can out-source your credit control duties to an external company. Doing so will reduce your wait for payments, resolve queries, save you time and money.


For and against the Invoice Financing

For 
  • Instant access to cash
  • Accounts receivable is handled by the factoring company
  • Your cash flow will not be affected since there are no fixed term repayments
  • Invoices are secured against the funding received so your credit score won’t be hurt
Against
  • Values of your invoices are reduced because of factoring company fees
  • You can damage your relationship with your client if you do not find the right company. As an example, a factoring company may suspend you trading with your client because of your client’s bad credit scoring.
  • You may become reliant on invoice factoring, which could potentially harm your entity in long run.
  • Factoring companies do not accept invoices which are old.

Cashflow Financing

Cash flow financing is a form of funding where a loan is provided to you (your business) depending on your expected cashflow. This is different from asset backed funding where assets are considered the collateral.

It can be either short term or long-term agreements, where repayments of the cashflow loan is based on projected cashflows. These loan agreements are typically based on sufficient levels of Earnings Before Income Taxation, Debts and amortisation and as well as ability of managing interest as an expense.