Invoice Factoring is usually the first option considered by businesses looking to leverage future payments for their goods and services.
However, there are many more routes to go down. The question then is, which is best for me?
Invoice Finance is a broad term, put simply it is when a third-party company agrees to ‘buy’ your unpaid invoices for a price.
These financiers can be commercial finance specialists or part of broader companies like banks and financial institutions. In recent times crowd sourcing platforms like Market Invoice have become popular.
In the UK, there are broadly two types of invoice finance. These are Invoice factoring and Invoice discounting.
It is also worth mentioning invoice trading which has witnessed considerable growth in recent times. It can be compared to crowd funding where high net worth individuals will be approached to provide finance, rather than traditional financial institutions.
The easiest way to approach the different options is to take each in turn and look at the advantages and disadvantages to each.
What is Invoice Factoring
This will usually involve an invoice finance company that provides management of the company’s sales ledger and any debtors in this. Sometimes called accounts receivable factoring, the financier will seek to collect the money on behalf of you from your client.
Of course, the company’s customers will be aware that the business is using invoice factoring. Usually some understanding will be established between the invoice financier and the end clients accounts department.
When an invoice is raised, the financier will ‘buy’ the debt that is owed by the end customer. A percentage of this is made available to the company with a day or two. Usually around 85% of the total. The invoice financier then has the responsibility to collect the full owed balance from the customer.
Once this has been received the remaining balance is paid to the company minus an agreed percentage fee and ‘discount charge’. In the end the cost of the service through these fees and charges will depend on the invoice finance company and how credit worthy the end customer is.
Advantages of Invoice Factoring
Collection of your sales ledger is essentially outsourced. This can free up much valuable time for businesses.
The invoice financier has the responsibility to credit check customers so you are more likely to deal with ‘credit worthy’ clients.
Disadvantages of Invoice Factoring
It can be a disadvantage if you have a clientele that prefer to deal with your company directly.
Like above, it could affect the image of your company as the factoring company may have a different approach to business than
Invoice Trading Platforms
Is like factoring however invoice trading will involve companies ‘selling’ their individual invoices to financiers. It’s a subtle distinction but the key difference is that invoice trading will uses online platforms as means to connect businesses with potentially investors. Thus bypassing the traditional financiers.
You can think of it as peer to peer lending for invoice finance.
Advantages of Invoice Trading
Essentially you can pick and choose which invoices are offered for sale. You don’t need to outsource the debt collection for the complete sales ledger. With factoring companies, you usually do. This kind of invoice financing is ideally suited to businesses that deal with clients who demand longer credit terms.
For example, let’s say most clients of a company are comfortable with 30-day net credit terms (underwritten by the company itself). However, one particularly large and powerful customer insists on 90 days as a pre-condition to doing business.
It’s quite a long time to be without the cash. The company could use invoice trading for this customer to access the cash straight away.
Disadvantages of Invoice Trading
As with factoring company’s clients may prefer to deal with you directly. This could also affect your company image.
Invoice Factoring vs Discounting
With invoice discounting the invoice finance company will not manage the company’s sales ledger or collect owed invoices on their behalf.
The invoice finance company lends the company money against the unpaid invoice. In most instances this is an agreed percentage of the total value. The service itself will often have a pre-arranged fee.
The company still has the responsibility for collecting the owed debts with invoice discounting. Discounting can though be arranged confidentially so that the customer is not aware.
In a lot of way this is a form of flexible financing like that of a bank overdraft. The business has access to short term cash that it can draw on when required. For this they pay a fee.
Advantages of Invoice Discounting
Confidentially. Your clients do not have to know that you are borrowing against their invoices.
Disadvantages of Invoice Discounting
Responsibility still lies with the company for collecting debts.