Invoice finance funds

Collectively known as invoice finance, factoring and invoice discounting release cash against monies already earned. Both facilities can prove to be a vital cashflow solution in this difficult economic climate.

Obtaining finance is becoming more of a luxury as the banks are not as credit-friendly as they were prior to the global economic recession. The situation is even made grimmer as the costs of running a business are on the rise. How do businesses survive?

Abiding to a professional and concise business plan, using the right accountant and having the right staff are a few key factors that can give a business momentum in the short run. However, cashflow is what makes a business. Careful management of cashflow is key to business continuity and survival.

It is a common mistake to confuse cashflow management with cost optimisation. Cashflow management is ensuring that your income surmounts your expenditures at any particular time in the business cycle. Cost optimisation are techniques used by businesses to realise recurring cost savings.

Many businesses are caught flat-footed as they often have huge chunks of cash locked up in outstanding invoices. Customers could take up to 90 days to complete payment for invoices. Though this may be in the terms of the agreement, your business might be financially strained, with limited working capital to cover payroll, reduce existing debt or cover administrative overheads.

This is where factoring and invoice discounting are here to help. Instead of waiting 30-90 days for customers to settle their bills, either facility can release up to 95% of the value of your outstanding invoices, usually within 24 hours of raising the invoices. Both facilities work in a similar way – release a pre-arranged percentage of the sales ledger almost immediately. However, they differ in the following ways:

  1. Because the funds are advanced against monies to be paid, there’s a credit control function midway through the process. A factoring arrangement allocates the credit control task, including chasing customers for payment to the finance provider. Invoice discounting allows the business to manage its clients and outstanding payments.
  2. Based on 1) above, invoice discounting is tailored to larger businesses with turnover in excess of £250k and in-house credit control systems. On the other hand, factoring is a particularly attractive option for smaller companies, including start-ups.
  3. With invoice discounting, the customers are unaware of the lender’s involvement. Moreover, factoring is typically a disclosed arrangement as the customers are notified of their invoice payment.

Advantages of Factoring

  1. The funds released improve your cashflow position and the additional working capital created enables your business to expand.
  2. Factoring boosts your bargaining power, enabling you to capitalise on early vendor opportunities and discounts.
  3. The cash advanced grows alongside your business. This means that as your business grows, you could have access to more funding.
  4. The credit control function outsourced to the finance provider allows you to concentrate on growing your business.
  5. Unlike other forms of commercial finance such as bank overdraft, factoring could be a flexible funding facility for start-up companies.

Advantages of Invoice Discounting

  1. The funds released improve your cashflow position and the additional working capital created enables your business to expand.
  2. Invoice discounting boosts your bargaining power, enabling you to capitalise on early vendor opportunities and discounts.
  3. The cash advanced grows alongside your business. This means that as your business grows, you could have access to more funding.
  4. The facility is typically administered on a confidential basis. You stay in contact with your customers with them unaware of the funding agreement.
  5. Because the funds are released almost immediately, there’s some certainty about cash projections.

Other Forms of Factoring

  1. Recourse Factoring: The finance provider manages your sales ledger without any credit protection. This means that if your customers default, you are liable for all credit costs.
  2. Non-recourse Factoring: This is a factoring arrangement where the finance provider takes full responsibility of the sales ledger and bears any risks associated with bad debt. This saves your business the hassle of worrying about customer defaults.
  3. CHOC’s: Factoring is assumed to be a disclosed arrangement with outsourced credit control. However, CHOC’s (Client Handles Own Collections) facility keeps the business in charge of their sales ledger. This could be a cost-effective solution for SMEs with in-house accounting systems.

Other Forms of Invoice Discounting

  1. Recourse Invoice discounting: The finance provider manages your sales ledger without any credit protection. If an invoice remains unpaid, the finance provider reclaims the cash previously advanced and you take on the credit control function.
  2. Non-recourse Invoice Discounting: You retain full control of your credit control system, but the finance provider offers you bad debt protection for the life of the contract.
  3. Disclosed Invoice Discounting: Your customers are notified of the lender’s involvement, making it a less risky proposition to lenders than confidential ID.

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