Dec
25

What is Invoice Financing?

Invoice financing is one of the names used to describe a financial service whereby a company can obtain a loan against the value of a sales invoice for goods or services that have already been delivered or completed.  It is a financial facility aimed at business to business companies that deal in credit, rather than retailers who take payment at the point of purchase or companies with a steady cashflow. 

Invoice finance, as the name implies, is a service whereby a lender will immediately pay some of the value of an outstanding invoice owed by a third party.  Depending on the terms and conditions agreed beforehand, the lender may then pursue and collect payment of the invoice from the company or client to whom the invoice was issued.  In other scenarios, the responsibility for maintaining the debt may remain with the company that issued the invoice.  This is known as invoice discounting, whereas the facility whereby a lender will chase an outstanding invoice from a third party is known as invoice factoring. 

If a company accepts an invoice discounting agreement with a lender, it continues to be responsible for the money it borrows against the invoice.  As a safeguard against bad debts, it is possible to take out insurance in case the invoice ultimately remains unpaid.  This will increase the potential fees and interest paid against the original debt, although it will help the company that suffered the debt to maintain financial security.

Dec
04

Invoice Factoring Explained

Invoice factoring is the term for taking on the risk of another company, for goods or services already provided but not yet paid for and the debt is known as an account receivable.  Accounts receivable are usually due for payment within a specific timescale, usually between 15 and 60 days.  However the period of credit can sometimes be longer, especially for larger, more expensive goods.

Under the terms of an invoice factoring arrangement the factor takes over responsibility for the accounts receivables, paying the client company 80-90% of the amount outstanding, up front and then collecting remaining debt.  At the end of the agreed period, the remaining 10-20% is paid to the client company, less a percentage for interest and charges.

There are three parties involved in this arrangement, the company providing goods or services, the financing company or factor and the customer.  The factor is taking on a risk by, in effect, purchasing the customer’s debt and will therefore charge a higher amount in fees and interest depending on the perceived creditworthiness of the company.

Interest charges are usually a percentage of the amount borrowed and range from 1.5% – 3% above the Bank of England base rate.  The management charge, which is made in addition to the interest charge, is normally in the region of 0.5% – 2.5%.  The level of management charge or handling fee will depend on the company’s turnover and volume of sales processed.

Nov
25

How Does Invoice Factoring Work?

Invoice factoring, sometimes known as ‘accounts receivable financing’, is an option that allows businesses to receive a cash advance against invoices owed to it by its customers.  A factoring company purchases the outstanding debt, offering the business a percentage of the total in cash.

What Costs are Involved?

Any invoice factoring company UK based at least, will usually charge a processing fee and/or a percentage based on the credit standing of the business’ clients or how long it takes to collect the invoices.  Depending on the contract with the factoring company, either all of the business’ invoices may be factored or only a few.  The contract can be long or short-term, depending on the needs of the business and the factoring company’s policies.

How is Factoring Different From a Bank Loan?

Banks normally loan money based on concrete, physical resources, such as buildings and vehicles.  A bank may also be willing to extend a line of credit to a well-established business based on past sales records and the viability of its business plan.  A factoring company is solely interested in purchasing the debt owed to the business and therefore makes the offer based on the credit worthiness of the its clients.

What Makes a Business a Good Candidate for Factoring?

A business might consider factoring as an option if:

•    Goods and services are offered to clients on credit.

•    Clients are other businesses.  Factoring is not normally offered to retail businesses that deal with individual customers.

•    Cashflow is an issue, due to the period of credit allowed between the services or goods being supplied and payment received.

•    The business could benefit from assistance collecting overdue payments.

•    Cash needed for expansion, expenses or supplies is tied up in outstanding accounts payable.

Nov
15

What is Invoice Finance?

For many small businesses, cashflow is a major problem.  The time taken, from sending out an invoice to the money being paid, can be considerable and the business will still be expected to pay its creditors on time, usually in thirty days.  For businesses such as these, invoice finance may be the answer.  Invoice finance companies will lend the business money against its sales ledger debtors.  As the cash will be normally be available very shortly after the invoice is raised, probably within 24 hours, invoice finance can go a long way to avoiding serious cashflow problems and help the business improve its credit rating.

There are two options available, invoice factoring and invoice discounting.  The main difference being that invoice factoring companies take over responsibility for sales ledger and credit control.  An invoice financing company can also credit check new customers and help decide credit limits.  They will chase late paying customers on behalf of the business and provide all the advantages of an established credit control department.  The other difference between invoice factoring and invoice discounting is that, in the case of factoring, the customer pays the invoice factoring company.  With invoice discounting, the customer pays the business, which then passes the remittance on to the invoice discounting company.

Invoice financing means that the business will receive a percentage of the total value of an invoice, usually 80%, within 24 hours of it being issued.  When it is paid, the business will receive the balance of the invoice value after the financing company has deducted its fees.

Nov
04

The Cost of Invoice Factoring

Invoice factoring companies generate their profits by charging fees and interest.  The interest rate, which is typically in the range of 1.5% to 3% above base rate, is calculated on a daily basis.  These rates are roughly the same as you would be charged by a bank for an overdraft and could even be cheaper.  The fees for invoice discounting are based on turnover and are typically between 0.2% and 0.5%.  This is significantly cheaper than invoice factoring, because only finance is provided.

If the factoring company is to be liable for bad debts, it will charge for credit protection.  The factoring company will assess the risk of bad debts, having carried out an audit of the business’s debtors and will base their fees on this.  The higher the risk the higher the fee they will charge.  Again, the fees are based on turnover and are typically between 0.5% and 2% of the company’s turnover.

There is a large number of invoice factoring companies operating in the UK and is a very competitive market, so the cost of invoice factoring can be very reasonable; it definitely pays to shop around.

Cost should not be the only consideration when choosing an invoice factoring company.  You should take a close look at the level of service being offered and how much notice you need to give to terminate the agreement.  The notice period is usually three months, but some companies may expect you to give a year’s notice, so be prepared to haggle.

Oct
25

Concentrate On Running Your Business with Confidential Invoice Factoring

Factoring is an effective finance solution for almost any company.  It enables a business to sell its invoices in order to receive almost instant payment.  Companies can raise outstanding customer invoices and be advanced up to 95% of their value within as little as 24 hours.  This has no effect whatsoever on the credit terms agreed with the company’s customers.

Invoice factoring enables a business to receive the money they are owed for their outstanding invoices without having to wait a month or longer.  Furthermore, by using invoice factoring companies, the business is no longer responsible for chasing up customer payments; this task is down to the factoring companies themselves.  Factoring therefore bridges the often excessive period of time between presenting an invoice to a customer and receiving payment for the goods or services provided.

With confidential invoice finance, the factoring company collects outstanding invoice payments from customers in the name of the business they are working for.  This means that the customers are unaware of the fact that the company they are doing business with is using a factoring company.  Confidential invoice finance companies of this kind provide dedicated customer support to a business’s clients, yet they will be completely unaware of the fact that they are corresponding with an outsourcing company.

By taking advantage of confidential invoice factoring, business owners can concentrate on running their companies and leave the invoice finance company to organise credit control on their behalf.

Oct
15

Invoice Discounting Aids Business Growth

If you own a small to medium sized business, you will not need to be told that obtaining finance is harder than ever.  Until recently, it was always the banks that you went to for a loan and they normally offered loans and credit to proven successful businesses.  However, this was of no consolation for the small to medium sized business owners who struggled to qualify for additional finance.

Invoice finance companies have transformed the way in which small businesses can access finance.  These companies operate by offering small to medium sized companies invoice discounting services.  If your company provides products or services to large commercial clients that pay slowly; requires money for the payment of salaries and creditors or turns away significant orders due to their being a large hole in cash flow, thanks to slow paying customers, invoice factoring could provide a solution.

Invoice discounting eliminates the problems resulting from slow paying customers.  It allows your business to break out of the lengthy payment cycle without causing inconvenience to your customers.  With invoice discounting, you can receive the money owed to you in as little as two days.

Invoice factoring companies buy your business’s invoices and pay you the money your business so urgently requires.  Though they purchase your sales invoices at a discounted rate you will benefit from the immediate payment of a substantial proportion of the money that is owed to you.  This can then be used to run your business, while you leave the factoring companies to deal with credit control.

The process of invoice discounting is quick and easy to set up and will help you to get your hands on the money you need to enable your business to grow.

Oct
04

The True Value of Invoice Factoring

Factoring is a form of lending that involves money being borrowed from an invoice factoring company against the total value of a company’s debtor’s list.  Businesses use invoice factoring to smooth out their cash flow and to guard against losses resulting from late payment by customers. 

There are a number of reasons why invoice factoring is beneficial to businesses: 

•    When a company issues an invoice to a customer it knows it will receive money for the services or products it has provided. 

•    Companies save time, because the invoice factoring companies manage the sales ledger and deal with all credit control related matters. 

•    Businesses avoid having to take out long-term loans.  Though invoice factoring may be seen as a loan of sorts, it is effectively reduced each time an invoice is paid.  Furthermore, factoring is priced more competitively than conventional business loans.

Factoring companies typically split the fees for their services into two distinct parts, a service fee and interest.  The service fee can be priced at anything between 0.5% and 3.0% of its client’s turnover.  Interest, on the other hand, is charged against the value of each invoice and is usually a fixed rate.  Different factoring companies will offer different rates, usually based on your own business’s credit rating and turnover.  For this reason anyone considering employing such a company should compare quotations from as many as possible before making a final choice. 

Go back to top