Benefits of invoice finance
Key benefits of invoice finance solutions include:
- Up to 90% of your invoices issued to clients paid upfront
- Facilities available to businesses of any age including new-starts
- Bad debt insurance available to protect your business
- Can be quick and easy to set up
- Facility sizes can increase as your business grows
- Facilities can be confidential so your clients are unaware that you are benefitting from finance
Invoice financing unlocks cash flow quickly and can directly address one of the primary causes of cash flow challenges resulting from clients paying slowly. Cash can then be used to fund additional orders, support cash flow , or used for further investment.
There are different types of invoice financing available to suit your needs, with pay-as-you-go options providing a lot of flexibility.
Invoice finance providers typically offer credit control services which can help businesses manage their outstanding invoices and reduce the risk of bad debt or non-payment.
This type of financing can be particularly powerful for businesses that have long payment terms, or those that are growing rapidly and need to manage their cash flow.
What is invoice finance?
Invoice finance is a form of financing that allows businesses to raise funds by using the outstanding invoices that their clients haven’t paid yet as security for finance. It is a type of asset-based lending that provides businesses with immediate access to cash flow, enabling them to manage their working capital and grow their business.
As invoices are used as security for funders, it is an appropriate option for businesses trading with other businesses, however isn’t generally viable for businesses who only sell directly to individuals as their customers.
Invoice financing may enable businesses to offer credit terms to their customers where their competitors cannot, potentially leading to them winning business and growing faster than their peers.
There are several types of invoice finance facilities available as follows:
- Factoring
- Invoice discounting
- CHOCC/CHOCS factoring
- Spot factoring
- Selective invoice discounting
One of the key differences between the various types of invoice finance is who handles the credit-control and collections process. With factoring, the finance provider typically will contact your clients for payment whereas with discounting you would be in charge of your own collections process.
When we help clients arrange invoice finance, we ensure that the solution we source is appropriate for your ledger, your credit control process, and ongoing cashflow requirements.
If you already have an invoice finance facility, we can review your terms to ensure you are getting the most competitive facility in the market. Sometimes your existing invoice finance provider will not extend your limit in line with your growth and/or work against your business’ success. We can introduce funders that will align more appropriately with your business’ plans and growth.
Types of invoice finance
Factoring
Factoring is a type of invoice financing where the business sells its outstanding invoices to a factoring company, or a factor, for a discounted price. The factor then takes over the responsibility of collecting the payments from the customers. The business receives a percentage of the invoice value upfront, typically around 80-90%, and the remainder, minus the factoring fee, is paid to the business once the invoice is paid by the customer.
Factoring can be a good option for businesses that need to raise cash quickly and do not want to manage their own credit control and collections. It can be an option for businesses of any age, right from the point of being established.
Invoice discounting
Invoice discounting is a type of invoice financing where the business retains ownership of its outstanding invoices but uses its invoice/debtor ledger as collateral to raise finance. The business can borrow against its invoices, typically up to 90% of their value, and repay the loan once the invoices are paid by the customers. Unlike factoring, the business remains responsible for managing its own credit control and collections.
Invoice discounting can be a good option for businesses that want to maintain control over their relationships with their customers. As you retain control of the credit control process and monies are paid to you by your customers, they are not aware that finance is being raised. This type of facility is often referred to as being confidential.
Typically, businesses need to have a bit more established trading behind them before invoice discounting becomes an option over factoring.
CHOCC/CHOCS factoring
CHOCC (Client Handles Own Credit Control)/CHOCS (Client Handles Own Collections) is a variant of factoring where your clients are aware that you have a financing arrangement, however you are in control of chasing for payment rather than the funder.
This blended approach leaves younger and smaller businesses in greater control of their client relationships, whilst still benefiting from invoice financing. Additionally, this type of arrangement can potentially reduce costs for your invoice factoring facility where you have a large number of smaller invoices to a lot of clients.
Spot factoring
Spot factoring is a type of factoring where the business can choose which invoices to sell to the factor. This can be a good option for businesses that want to raise finance on an ad hoc basis or just for a short period of time to solve a temporary cash flow constraint.
Selective invoice discounting
Selective invoice discounting is a type of invoice discounting where the business can choose which invoices to use as collateral to raise finance. You are still in control of issuing the invoice and chasing up payment but you do not have to finance your entire debtor ledger.
How does invoice finance work?
A typical invoice finance application journey is as follows:
- Send us your details: This will include your business’ financials, bank statements and aged creditors/debtors’ analysis and/or any specific invoices you wish to finance.
- Discuss your cash flow goals: We will review your details and chat through your cash flow challenges with you to ensure the type of facility we source is the most appropriate avenue.
- Select your finance option: We will source the most appropriate solution(s) for you to review the repayment terms and facility particulars. Good working relationships are important for invoice finance so we will look to introduce you to the funder early on to ensure they are a good fit for your business. Once you’ve confirmed you’re happy with a solution we will arrange for documentation to be issued to and signed by you.
- Completion: The facility will be set up, often with a large initial advance of cash raised against your outstanding invoices.
Once the facility is established you will raise invoices to customers as usual, but also submit a copy of the invoice to the funder. With invoice discounting, the funder will advance payment against this invoice and you will pay them back when your client pays you. With invoice factoring, the funder will collect payment from your client and pay you the remainder of the balance less their fee upon receiving your client’s payment.