For companies frustrated by persistent late payment problems, invoice financing can provide a useful way of freeing up the value of their outstanding invoices.
In recent years, the two main invoice finance products – invoice discounting and factoring – have become increasingly popular, as approvals for traditional lending products (e.g. overdrafts, bank loans) have decreased.
What is invoice finance?
In both cases, the invoice finance supplier will advance your company an agreed percentage of the value of your outstanding invoices (typically 80-85%). Your company will retain responsibility for chasing the invoices under the basic ‘invoice discounting’ model, or will take over responsibility for your entire invoice management under the ‘factoring’ model. A factoring solution will mean that a third party will chase up outstanding invoice payments on your behalf.
The invoice finance company will take an agreed percentage of the outstanding money for its efforts.
Benefits of invoice finance for limited companies
The main benefit of using an invoice finance provider is that your cash flow will immediately be freed up. You will no longer have to wait for customers to settle invoices – a great relief if you’ve had to wait many months beyond the agreed credit terms for payment to be made.
The other key benefit, in the case of a factoring solution, is that the administration of your invoice management processes are taken over by a specialist third party team, freeing you up to concentrate on running your business rather than chasing your customers’ accounts departments for unpaid invoices.
Factoring solutions are more likely to be used by smaller companies, as larger firms are more likely to have the staffing capability to manage their own cashflow management processes more efficiently.
Customers and clients will pay the factoring company directly, so this alone may spur them on to settle outstanding bills in a timely manner.
How much does invoice financing cost?
For factoring solutions, which will apply to the vast majority of smaller companies, the factoring company will forward a percentage of the outstanding invoice value, and your clients / customers will pay their bills direct to the factor.
Once payment has been received, the balance will be paid to you, minus pre-agreed fees for their collections service (typically between 0.75% and 2.5% of turnover), an interest charge on the funds advanced to you, and credit insurance – if applicable.
The new GOV.UK site has a concise guide to factoring and invoice discounting here.
The ABFA (Asset Based Finance Association) has some useful information on how invoice finance work, and how to find a suitable provider.