“What is Invoice Finance?

Put simply, invoice finance is secured lending where the security is provided by unpaid invoices. Many companies do not appreciate that unpaid invoices can be the largest asset on their balance sheet and that they are potentially under leveraged and neglecting a great source of working capital. In addition, invoices are also legally recognised allowing the lender the chance to securitise their lending rather than use floating charges in the form of overdrafts.

Almost all invoice finance facilities work on the basis that all acceptable invoices will be funded by the invoice financier up to an agreed percentage the same day or day after they are raised. When the invoice is paid, the invoice financier will pay the resulting balance to the customer minus their fees. If an invoice cannot be collected it is returned to the customer or, if it is a non-recourse facility, a credit insurance policy covers the invoice.

What is Factoring?

Factoring is the branch of invoice finance which is designed for smaller companies due to the additional services which are offered by the factor. In addition to the finance facility, the factor can also provide full sales ledger management including credit control and collection. For companies with a low number of stuff this can be a lot more cost effective than employing full time member of staff to act as a financial controller.

Factoring at a glance

The following four steps are an over view to factoring:-

  1. Your business raises an invoice and sends a copy to your factoring company
  2. The factorer then advances you a % of the gross invoice value, the percentage is usually around 85%.
  3. Your factoring company will then send out statements and collect the cash previously invoiced.
  4. The factoring company will then pay you the rest of the balance, minus charges.

Factoring is designed to help you release money tied up within your company. The largest asset a company has is typically their unpaid invoices. By using a factoring service you can release up to 85% of the gross balance invoiced for. This will then allow you to put the money straight back into your business without waiting for overdue invoices etc.

An added benefit of using a factoring service is that the factoring company can also help you with the management and collection of invoices, for a small business with low head count this can prove to be more cost effective than hiring someone.

What is Invoice Discounting?

Invoice discounting is designed for companies who have a financial management and control process in place. The service is predominantly about money and not the additional services which are offered in a full factoring service. Invoice discounting is a growing service can allow several hundreds of millions to be raised.

Invoice discounting at a glance

The following four steps are an overview of invoice discounting:-

  1. Your company write an invoice as usual
  2. Your company send a sales daybook listing to your factorer
  3. Your factoring company can then advance you up to 85% of the gross daybook listings
  4. Your company send out statements and collect cash as usual
  5. Your company receives payment and banks the cash
    via a trustee bank account your factorer receives cash from your company’s customers.
  6. Your factoring company returns the remaining balance, less charges.