Invoice Finance and Factoring for small businesses
Cashflow can often be a problem for small and growing businesses. Here we examine some possible solutions to improving your cashflow, Invoice Finance and Factoring.
A Guide to Invoice Finance
In simple terms Invoice Finance is a means of optimising your cash flow, removing the peaks and troughs and ultimately making cash easier to manage.
Invoices are often overlooked as one of the most flexible ‘assets’ within the business. As such, rather than have money tied up in invoices that have yet to be paid, you can receive an initial payment up font (typically 80% of the gross value of the invoice) and the remainder when the customer pays the invoice to the Invoice Finance provider – less the service fee.
Your business thereby obtains the majority of the value from its invoices, instantly, without having to wait for the customer to pay…either on or over time.
What are the products?
Invoice Finance is broken down into 2 basic products; Invoice Discounting and Factoring.
Factoring
Factoring is a ‘full service’ facility which includes funding up to 90% of the invoice value up front, as well as employing a dedicated credit controller to run your ledger, including statements – eliminating the pain from being paid. If bad debt is of concern to you, ‘bad debt protection’ is also available on most accounts.
Invoice Discounting
Invoice Discounting is often used by medium to large companies as a more flexible means of acquiring finance than traditional methods, such as a business overdraft.
Outstanding invoices are commonly the largest asset your business owns and by using Invoice Discounting you can release more finance for the business, than would normally be available by other means. This facility is funding only, thereby differing from a factoring product as you will require your own in-house credit control department.
Factoring for Startups - How is it useful?
As factoring does not require a company to have been trading long enough to have produced their first accounts, funding is based on the strength of your invoices and so this is an ideal product for new companies.
Funding is available as soon as you raise your first invoice and grows in line with your sales.
Factoring also frees up valuable management time as all your credit control is managed by the Factor.
Factoring for small and medium sized businesses
Small to medium businesses which have been trading for over a year, can be eligible for Factoring or Invoice Discounting.
A rapidly expanding company may experience severe cash-flow shortages as more supplies need to be paid for to support continued growth. Unfortunately, going through rapid growth does not mean customers will pay invoices any quicker! Factoring and Invoice Discounting can bridge the gap between invoice and payment date.
For companies that do not have in house credit control or accounts functions Factoring is a cost saving alternative to hiring an in house credit controller. If you have an effective in house credit control function it is worth looking at Invoice Discounting for stand alone funding.
Established companies
Large companies use Invoice Discounting to leverage their invoices, which are often their main business asset. Borrowing rates are usually less than other forms of business borrowing, so provides cost effective funding.
Invoice Discounting is increasingly used as a primary funding vehicle for company acquisition MBO / MBI’s and so businesses fund themselves independently, or subsidiaries independently, from the main holding company.
How does Invoice Finance work in practice?
- Invoice – Fulfill your contractual agreements for your client, whether delivery of goods or completion of service. Invoice your customer as usual.
- Notify – Forward the lender a copy of the invoice (usually electronically), who will then calculate available funds.
- Funding – Borrow up to 90% of the invoice value from the lender.
If using Factoring:
The factor will conduct all the necessary credit control to manage the payment of the invoice from your customer.
If Invoice Discounting:
You conduct your normal credit control procedures until the invoice is paid
- Balance – When payment is received from your customer you get the remaining balance of the invoice value, less the service fee.
Posted January 12, 2010
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