Types of 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 generally provides around 90% of the sales invoice to the business.

They'll then collect the monies from the company's customers. You receive the balance, excluding collection fees, to the company concerned. There are generally four types of invoice finance: invoice factoring, spot factoring, selective invoice discounting and invoice discounting.

Invoice Factoring Finance

Factoring is a flexible method of funding the working capital needs of a company. The business submits copies of their sales invoices to the factoring company. They pay an agreed percentage of the value of the invoices into your bank account.

Payment Terms

The percentage available is usually up to 90% of the sales invoices. However, your deal depends on a number of things including the type of industry, and the risk profile of your customers.

Third-Party Interaction with Your Customers

The factoring company maintains the debtors on behalf of the business. They'll contact the business's customer base for payment of the invoices when they become due.

When a customer pays the debt to the factoring company, the business receives the balance of the invoice. Of course, this excludes 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 generally between 0.5% to 2.5% of the sales value. While early settlement discounts reduce these rates, they are not common. You'll have interest charged on the amount of funds advanced from the sales invoices at 2.5% over base rate.

Invoice Discounting

Invoice discounting is similar to invoice factoring as another method of freeing cash flow. But, the business customer doesn't know that a third party is collecting the debt. Generally, it's 100% confidential. It works in exactly the same manner as factoring. Up to 90% of the sales invoice gets advanced by the discounting company with similar fees.

Advantages of Invoice Finance

  • The business gets instant access to cash from their invoices.
  • You can get to 90% of sales value normally within 24 hours of passing the debt to the factoring company.
  • The sales process is outsourced leaving time to manage the business.
  • More likely to receive the monies from invoices.
  • Don't need overdraft facilities or bank loans.

Disadvantages of Invoice Finance

  • There are charges to pay to the factoring company to collect the monies (between 0.5% and 2.5%).
  • A third party contacts your customers rather than yourselves.
  • The factoring company may have a tough stance to collect the debt.
  • The factoring company may outsource their collection facility.
  • Your customers may believe your business is in financial trouble because you're using a factoring company.

Things to check in Contracts with Factoring Companies

  • How much are the fees?
  • What is the length of contract?
  • Are there any exit penalties?
  • Is there a trial period?
  • Check the reputation and obtain any client references.
  • Financial strength of the invoice finance company.
  • Check all additional fees such as auditing fees, bank transfer fees, bank charges, etc..

Invoice Discounting and Factoring Companies

There are many factoring companies and brokers in the marketplace. We recommend you do your own research before entering into any agreements. Below are some examples: