Invoice Financing and Factoring

Invoice Financing is one of the most accessible and common forms of finance on the market. It is essentially borrowing money against the invoices you have sent to your customers – also known as your creditor book. A lender will lend you a percentage of your creditor book or invoice and will take their money back when the invoices are paid. You can either finance your whole creditor book or individual invoices depending on how much you would like to use the facility.

Invoice Financing works well across lots of different industries and different size businesses. However, there are other similar products available such as Factoring - which includes credit control and is often chosen preferably amongst smaller companies with lower value invoices. There is also discounting or selective invoice finance – which is more suitable for larger companies who have larger, more creditworthy customers.

The one problem with any type of invoice financing is the amount you can borrow. You are always restrained by the amount you invoice your customers. So if you want to release more capital than the amount your company has sold, you will need to use this in conjunction with other forms of finance.

An Example

Julies Apples Ltd is a farm that grows and sells apples to Tescos Supermarket. Julie has already had to spend cash to buy the seeds, grow the apples, water the trees, take the apples off the trees, clean the apples, crate the apples and transport them to Tescos. Tescos will probably buy by the truck or pallet and they currently have 180 day payment periods for their invoices. This means that Julie will have to wait 180 days to get paid by Tescos, starting the day she drops the apples off. Julie needs cash so she can water, pick and crate her next batch of apples.

Julie uses Invoice Financing and agrees to pay charges and fees of 2% and receive 80% of her invoice upfront.

Breakdown:

Invoice value = £10,000

Advance amount (80%) = £8,000

Fees (2%) = £200

When Julie takes the invoice to her lender, she receives an advance of £8,000 within a couple of days or in some cases instantly. Then, when Tescos pays the invoice, the full £10,000 goes into a bank account controlled by the lender, not Julies Apples bank account. Julie then gets the remaining value of the invoice (£2000) minus fees (£200), so she receives £1800.

The fees will change depending on how secure the creditor is and what risk the lender is taking on being paid back.  

Different types of Invoice Finance

While all invoice financing uses the same principles, there are several different varieties of Invoice Financing that can suit different businesses better. It all comes down to how much control you want over the process and terms & conditions of the finance.

Here is a brief breakdown on the different types of Invoice Financing. Again, don’t forget the best way to navigate through this, is for one of our brokers to give you a buzz and take you through your different options.

Invoice Factoring

This is essentially handing over the control of that invoice to the lender. It allows the lender to call your customers and chase them for payment if they have not paid or are late at paying. It will also give the lenders the power to credit check potential customers to make sure that they are good customers to take on or not.  For some customers this is ideal, however, for some, this is scary and could be detrimental for business.

For some industries, it is common for companies to use Invoice Financing facilities, however for some smaller companies they may not want their clients to know they are using finance, as they don’t want to put doubts in their customer’s minds that they can’t produce the goods or deliver the services the customer wants.

While factoring is easier to get for smaller companies, companies must think whether this is the right service for them and their customer base.

Invoice Discounting

This form of Invoice Finance is the most common, however, is only available for more established businesses. In Invoice Discounting the lender takes a backseat and allows the business to take control. It is a lot more hands-on for the business, however, it gives the company the power to chase their own invoices and does not muddy the waters about what size supplier they are to their customers.

The big things with Invoice Discounting is credit control and turnover. To be accepted for discounting you need to prove to the lender that you can chase your own invoices and that your customers tend to pay relatively on time. You must also prove that the turnover of your business is strong enough to pay the lender if your customer doesn’t pay for any reason.

Selective Invoice Finance and Spot Factoring

As it says in the name, Selective Invoice Finance and Spot Factoring are similar in a way to revolving credit facilities, in the way you can use them when you wish to use them.  There are freedom and flexibility, unlike with Factoring and Invoice Financing which will discount or factor all your creditor book.

With Selective Invoice Finance, you can choose a specific client to only invoice finance and with Spot Factoring, you can choose specific invoices.

This is a great ad-hoc service and is great for companies that want the flexibility and freedom to access the working capital from invoice financing only when they need it. The downside to this sort of invoice financing is that lenders tend to offer it to more established companies and it is generally harder to secure than factoring or discounting. Either way, you will never know unless you ask.

Get in touch today and let’s see if our brokers and partners can help advise you to the best type of Invoice Financing for your business and the best lenders for your companies situation.