What is Invoice Finance & Factoring?
Invoice Finance allows business owners to use their invoices as a form of collateral to secure a business loan or line of credit. This type of finance can allow businesses to account for gaps in cash flow including those due to delayed payments from customers. An invoice facility can be particularly useful for businesses that have outstanding invoices. They may still need to access working capital quickly for various operational needs but do not want to take on additional debt.
Because your companies’ invoices serve as collateral, invoice financing can be easier to qualify for compared to some other loans.
Invoice Financing/Discounting vs Factoring?
Both invoice finance and factoring are commonly used by businesses to manage their cash flow and ensure they have the funds necessary for operations, growth, and other financial needs. The choice between them often depends on the size of your business, the industry you are in, and most importantly whether you wish to retain control over your credit management.
With invoice financing, you maintain control over the invoices and still deal directly with your customers. You get a portion of the money upfront from the lender. When your customer pays the invoice, you get the remaining balance — minus the fees you’ve agreed to pay. Invoice financing is usually a better option for businesses that want to maintain control over invoices and deal with their customers directly, therefore maintaining confidentiality.
With invoice factoring, the lender advances funds to the business, but also takes on the responsibility for managing the sales ledger, credit control and collections of the invoices. Essentially you sell your invoices to a factoring company at a discount. The factoring company pays you a portion of the invoice’s value and then takes over its collection. After the company receives payment from your customer, it sends you the rest of your money, minus the agreed-upon fees.
Factoring can be a better solution if you don’t mind giving up control of invoices and you trust the factoring company to be respectful and professional when dealing with your customers. This is not a confidential service but can be particularly beneficial for businesses that want to offload the administrative burdens of managing their accounts.
How the facility works?
- The Lenders advance a percentage of your unpaid invoice amount — up to 90%. When your customer pays the invoice, you’ll pay the lender back the amount loaned plus fees and interest.
- Invoice financing companies can charge fees in different ways, but usually they charge a flat percentage (1% to 5%) of the invoice value.