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What is Invoice Factoring?
Invoice Factoring is an asset based lending product that will lend against your businesses unpaid invoices, this allows you to leverage cash that is tied up in moneys owed. Typically any business that offers services or products to another business can receive 85 – 90% of an invoice. Invoice Factoring can protect a company from the late payment of invoices and save the time required to chase them. It is especially useful for companies that offer credit to their clients.
Invoice factoring explained
Shortage of working capital and Late payments are a cause of major headaches for small business owners. This simple process of getting the cash in on time can make the difference between success and failure for the business. This is where invoice factoring can play apart and offer a workable and valuable solution.
It is a form of short term borrowing whereby a third party will buy your invoice for a fee ensuring that a lack of cash in the here and now won’t stand in the way of your future profit. This frees up both cash and time for you to concentrate on your core business activity and on making it a success.
Depending on the type of invoice finance package you choose you can either use factoring, that’s an invoice financier to manage your sales ledger and collect money owed by your customers, or invoice discounting where you will be lent a percentage of the funds owed to you to drive your business forward, before the debts have been paid and without your customer’s knowledge.
Both routes offer a useful cash injection by providing a large and fast funding stream for your business.
Specialist products available in the UK markets include Forward Finance from Bibby, this product is aimed at businesses with a turnover usually lower than £300,000 per annum. Construction Finance sector specifically offering advances against outstanding billing tranches and Selective Finance, Single Finance and Spot Finance which are all terms commonly used for raising funds against individual invoices.
The Process of Invoice Factoring
Invoice Factoring Process
When a sales is made you generate an invoice, an assignment is added to the invoice , this means an instruction to pay the factor directly. A copy will also be sent to the factor, who makes an agreed percentage available to your business almost immediately. The factor will then issue statements to the customer on behalf of your company. It is the factor who will collect the money from the customer. The customer will pay the factor 100% of the invoice, and they will then forward the balance to you.
Who is Eligible for Invoice Factoring Services
Factoring only covers B2B (Business 2 Business) transactions. Each factor will have their own set of conditions that determine whether a business is eligible, so the requirements for obtaining a factoring service will vary. Specifically, qualification may depend on the company’s turnover, and requirements will vary from industry to industry. Some factors specialise in different businesses, such as the building industry, real estate or recruitment.
However, there are some general similarities across all sectors.
Your company’s credit rating will probably determine what percentage of the invoice you can receive.
You will have to give evidence that your company has UK registration.
Factors will request financial details about your business, such as turnover.
Pros and Cons of Invoice Factoring?
Every company has some months that are better than others, but invoice factoring can generate immediate income to stabilise cash flow. It is most often used to fund expansion of rapidly growing businesses and provide the flexibility to plug a shortfall. A loan involves taking a longer-term risk on the future performance of your business, but invoice factoring is being paid early for work that is already happening. Invoice factoring is still directly tied to the productivity of your business, so it grows with you and does not involve loan renegotiation.
Because the factor collects the money owed, it has the added advantage of reducing the administrative part of the process for your own company. Some UK Business use factoring simply to reduce admin costs on the credit control side of the business. This is due to the Invoice Factoring UK provided using their over credit collections departments to chase outstanding invoices.
What is the difference between invoice factoring and discounting?
More than 40,000 UK businesses are using some sort of asset based lending and have used their invoices at one time or another. There’s no doubt that invoice financing can provide a valuable short term funding opportunity for businesses looking to improve their cash flow and, in many cases, expand their client base. However, despite many similarities, this type of lending is not a case of one size fits all! There are two main routes to this sort of lending and understanding the differences between them is crucial when it comes to getting the right short term borrowing solution for your business.
The main difference between invoice factoring and discounting is with who takes responsibility for the sales ledger and collecting payment from customers.
Invoice factoring means the factor company pursues the payment on behalf of your business:
They buy your raised and unpaid invoices for a percentage and at a discount
They collect payment from your debtors
They provide you with the remainder of the balance once it has been paid
They take a fee for the service out of the final payment
Invoice discounting enables businesses to retain their sales ledger and payment collection from their customers:
You send an invoice to the customer as usual and a copy to the invoice finance lender
The lender purchases your invoice at an agreed percentage of the value minus their fee and usually within 24 hours
You keep responsibility over the administration of your invoice
You receive the remaining balance of the invoice value less any charges
While both invoice finance routes offer a fast and straightforward path to boosting cash flow for small businesses, other benefits do differ slightly and are worth taking into consideration.
Benefits of using invoice factoring include:
It saves time and stress when it comes to chasing customers for payment
It allows business leaders to focus on future service delivery, building their business and generating more income
It increases your businesses chances of dealing with clients who pay on time because factor finance companies will run credit checks on future customers
It offers the potential for you to gain help negotiating better terms with your suppliers
Benefits of using invoice discounting are:
Control over the collection of funds, sales ledger and credit control remains within the business
You can continue to nurture contacts with customers by collecting directly from them
It is discreet form of lending and customers need never know that you are using invoice financing
It is very fast – in some cases you can have the funds in your account within 24 hours
Best way to Compare Invoice Finance Quotes.
All Invoice Finance costs to businesses differ some factors like Ashley Invoice Factoring only deal with small companies. Hitachi Capital Invoice Finance will request that businesses have a starting turnover of about £500,000 per year as a quick guide. So usually a quick chat can ensure a better idea of costs once we get an idea of your business. Knowing that a factor is involved sometimes prompts clients to pay in a more timely manner. The factor themselves will usually pay within 24 – 48 hours of accepting an invoice.
However, because the factor contacts the customer directly, this is also a potential risk. That said, it is usual to agree a protocol for contacting your clients with the factor beforehand.
Sometimes factors can refuse an invoice, so clear planning is essential.
The service is not free and there can be hidden charges.
Ending a factoring agreement usually involves some kind of notice period.
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