Invoice Finance

Invoice finance is an option that allows a small business to turn sales invoices into instant cash. The factoring company purchases the debt and immediately provides around 90% of the sales invoice to the business.

They'll then collect the monies from the company's customers and pay the balance, less fees, to the company concerned. There are two types of invoice finance: invoice factoring and invoice discounting.

Invoice Factoring

Factoring is a flexible method of funding the working capital requirements of a company. The business submits copies of their sales invoices to the factoring company that pays an agreed percentage of the value of the invoices as instant cash.

The percentage available is normally up to a maximum 90% of the sales invoices dependent on a number of things including the type of industry and strength and spread of customers.

Invoice finance and factoringThe factoring company maintains the debtors on behalf of the business and will contact the business's customer base for payment of the invoices if and when they become overdue.

When a customer has paid the debt to the factoring company, the business receives the balance of the invoice less the factoring company's charges and fees.

The main benefit of factoring is in its flexibility. Unlike more traditional forms of finance, the amount of funding available is directly linked to sales generated. Therefore, additional finance is always available to meet increased sales.

Factoring charges

The two fees involved with factoring is a commission and interest paid. The factoring company's commission is normally between 0.5% to 2.5% of the sales value (less any early settlement discounts). Interest gets charged on the amount of funds advanced from the sales invoices at 2.5% over base rate.

Invoice Discounting

Invoice discounting is virtually the same as invoice factoring, but the business customer doesn't know that a third party is effectively collecting the debt, i.e., it's confidential. It works in exactly the same manner where up to 90% of the sales invoice gets advanced by the factoring or discounting company up front, and the fees are similar.

Advantages of Invoice Finance

Disadvantages of Invoice Finance

Things to check in Contacts with Factoring Companies

Invoice Discounting and Factoring Companies

There are many factoring companies and factoring brokers in the marketplace. Here are a few to check out although we recommend you do your own research before entering into any agreements.