Invoice finance is the name given to a group of related facilities that businesses use to get paid faster and significantly increase their working capital and improve their cashflow.
It is a way of borrowing money where the amount you can borrow is based upon the amount that your customers owe you. If most of your customers are other businesses and you produce invoices for payment you too could use invoice finance to speed up your cashflow.
It’s simple, rather than waiting weeks to get paid by your customers an invoice financier will advance you the majority of what you are owed immediately, so that you can pay your own bills promptly and concentrate on running your business, not worrying about getting paid.
When the customer pays your invoice, the money goes in to an account controlled by the invoice financier, who then pays you what is left after deducting the advance and his fee.
Invoice finance is the general term to describe three similar but distinct facilities,
The lender will review your collections from customers and will advance a fixed percentage of the amounts that you are owed. The ‘factor” will then take control of and operate your sales ledger, providing credit control services, and may at extra cost provide protection against bad debts.
Some businesses prefer this option because it allows them to spend less time chasing debts and to focus more on running the business. Because the lender collects the amounts due from the customers directly and chases late payments, your customer will know that you have ‘factored’ your debts.
On the one side, not every business would be happy to disclose that they were factoring their debts. On the other side, because the lender is more involved and hands-on it may be easier for young or smaller businesses to obtain an advance this way than using confidential invoice discounting.
Confidential Invoice Discounting
Although the amount advanced is still based upon the amount you are owed by your customers, unlike factoring, you still run your own sales ledger and operate your own credit control process. You retain control, and the customer remains unaware you’re your business has discounted its invoices. It is the most straightforward form of invoice finance.
Selective Invoice Discounting
Selective Invoice discounting differs from both factoring and confidential invoice discounting in that not every invoice is discounted, you can choose which invoices you’d like to finance, and leave the rest unaffected. This could be particularly useful if there are a small number of larger invoices due from bigger, more established businesses.
Where a business has entered in to a long contract with a larger business and knows the amounts that will be billed every month, it may borrow a percentage of the total value of the contract and make repayment from the monthly income as it comes in. This is of particular benefit to small businesses supplying services to larger companies who may have a higher credit rating.