Traditional lines of credit are now harder for businesses to obtain as banks seek
to protect themselves against the risks associated with bad debts and changing
rules in banking mean that banks are restricting the provision of overdraft facilities.
Invoice finance is a method of raising finance that is available to any business
that has outstanding or unpaid invoices in its sales ledger. It is simple to organise
and these invoices are used to secure finance which can be lodged in a company
bank account in just 24 hours.
Invoice finance solutions are usually one of two types of arrangement, factoring
and invoice discounting.
Factoring and invoice discounting are technically different but achieve a similar
result for clients looking for a quick boost to their cash flows. Factoring involves
selling a debt from the sales ledger for a cash advance. Invoice discounting involves
the client obtaining an advance on the value of the sales ledger which is usually
between 80-90% but can be as much as 95% of the value in some circumstances. When
the invoice is paid the invoice finance company will pay over the remaining percentage
of the invoice value.
Once an invoice finance facility is in place a company will raise invoices to
clients as normal and their relationship with their customers is unchanged by
the presence of an invoice finance agreement. Funds can be transferred within
24 hours of the creation of an invoice meaning there are no more concerns over
when a payment will hit the bank account. If a factoring agreement is in place
the lender will utilise an expert team of credit controllers to chase debts whilst
under invoice discounting the client is able to retain control of the credit control
process. Both solutions offer a confidential option in which the relationship
between lender and business is not disclosed to the end customers. This means
that businesses can raise finance at short notice without impacting on their key
Benefits of Invoice Finance
Both factoring and invoice discounting solutions can be used to finance a business
for any reason whether it's to fund working capital, make a distribution to owners,
purchase fixed assets or to replace debt in the balance sheet. An agreement can
be entered into, which provides a competitive charging structure over a fixed
term period. The cost of finance is relatively inexpensive, especially when compared
to other forms of borrowing, other than long term loans. One of the key benefits
of both factoring and invoice discounting is that the facility grows alongside
the business. If sales expand rapidly then the facility will keep pace with that
change. Loans and overdraft limits do not alter without a review which involves
quite a lot of detailed analysis and planning. The existence of a factoring or
invoice discounting facility means that businesses do not run the risk of overtrading
because they can always raise the capital to fund their growth.
Other Points to Consider
Invoice finance is not just for large businesses with a sufficiently balanced
ledger to satisfy those who assess bad debt risk amongst lenders. It is also used
by small and medium sized businesses as well as start-up operations. Many smaller
businesses use invoice finance as a means of bolstering their credit control function.
Whilst an invoice finance facility does not necessarily mean that the responsibility
of collection is with the factoring or invoice discounting company, they often
have the knowledge and resources to chase outstanding debt effectively. Due diligence
completed before any cash is made available against the value of an invoice means
that businesses can be more confident in the recoverability of any debts on their
ledger. The rejection of a client from the debtors ledger for an invoice finance
solution can act as an early warning of an impending bad debt and businesses can
restrict trade accordingly.
There are many thousands of businesses in the United Kingdom successfully trading
with active factoring and invoice discounting facilities and many more that have
in the past relied on such forms of finance. This alone tells a story that invoice
finance is a widely used source of funding and one which is keeping pace with
the economic change experienced by businesses in recent years.
To discuss the invoice finance options that are available to your business or
to get an indicative quote, please call 01753 888 737 or complete our online quotation form.