Invoice Discounting and Factoring both fall under the general heading of Invoice Finance.
Invoice Finance allows businesses to receive up-front cash in return for handing over the eventual receipts from a specific batch of invoices.
While specific deals can vary, depending on the size of the company and the ease of chasing payments, it is usual for the advance cash payment received by a business to total around 80-90% of the invoice amount.
The principle advantage is that it gives your business an immediate injection of cash, usually within 24 hours and the facility grows as your business expands.
Having cash up front enables you to pay your suppliers more quickly, and negotiate better terms as a result, taking full advantage of supplier discounts for early settlement.
It also has the advantage of leaving you in charge of your sales ledger.
Request a callback
Why use us?
Many start-up businesses find it difficult to access traditional loans, due to a lack of financial history or assets with which to secure money. Invoice finance, on the other hand, relates entirely to the size of the existing business. Money is only provided when invoices are generated, and so it is difficult for a business to fall into more debt than it can handle.
Both Invoice Discounting and Factoring often require less personal liabilities than most traditional forms of lending, as cash is secured against the future payment of invoices.
There is one clear difference between the two methods of cash flow funding. With Invoice Discounting, the facility is confidential, and the business still retains responsibility for managing its own sales ledger, credit control and payment collection.
With Factoring the facility provider takes over the responsibility of chasing up customers and managing invoice receipts directly.
Invoice Discounting tends to cost less than Factoring since you are not paying a third-party to manage your sales ledger. With Invoice Discounting, you send a sales day book listing to the Discounter instead of copy invoices, and retain responsibility for running the sales ledger, issuing statements, collecting payments and chasing slow payers if necessary.
You pay the money you collect into a special bank account (trust account) and notify the Discounter. The Discounter then pays you the balance of the invoice totals, less an agreed charge. Charges consist of a service fee as a percentage of your annual turnover and an interest charge on the funds advanced to you. These are negotiated with each business.
Invoice Discounting usually suits larger businesses with a turnover that exceeds £250,000 these businesses need to be sufficiently resourced in order to manage their own sales ledger and are looking at alternative (or additional) methods of borrowing.
Factoring enables small businesses to avoid the financial and time implications of chasing invoices themselves. The training, administrative and salary overheads of establishing independent credit control procedures are not required because the invoice finance agency is undertaking these functions for you. What is more, since the invoice finance agency makes its money by securing payment from the invoices, a small business can rest assured that nothing will slip through the cracks.
Of course, it is important for any business considering factoring as an option to ensure that they find a reputable invoice finance agency to work with and that their customers understand that credit control is being dealt with by a third party. Factoring can free up cashflow at precisely the time it is needed, and enable a business to grow much faster than would otherwise be possible.
Factoring is usually suited for smaller companies, usually with a minimum turnover of £50,000, without a dedicated in-house credit department as it provides a payment collection service.