What is Invoice Financing and how does it help businesses?
Invoice financing encompasses a range of solutions offered by factoring companies and banks to solve business cash flow difficulties. Different products have been developed to meet the needs of different scales of business, all of which go beyond the scope and flexibility of traditional credit methods.
At the heart of this approach to credit provision is the cash potential in trade debt, and for this reason retail or cash only businesses are not eligible. However, if a business is invoicing on normal trade credit terms, they can use the credit offered by “factors” on that debt. Typically, up to 85% of the value of an invoice can be released within days of an invoice being issued.
There are three basic products available under the umbrella of invoice financing provided by companies often known as “Factors”. Factors, who may be finance houses, dedicated companies or banks, take on more or less of the debt risk, open an account and provide a line of credit ahead of debt settlement. The factors charge agreed fees for the level of service offered, and interest on the amount of cash actually drawn down. The credit is normally available within a day or two.
Invoice discounting, the simplest form, keeps the sales ledger administration with the client. Factoring, the next level, usually sees the sales ledger and debt recovery administration pass to the factor, who may also provide a wide range of management support services.
Suitable for large companies is asset based lending, where invoice financing is allied to a line of credit advanced against the fixed assets of a business.