Growing a business requires a reliable cash flow and often an injection of capital. The health of a company’s finances depends on customers paying their invoices on time. Even with standard business terms in place, some customers are slow to settle their accounts. This can limit any business expansion plans. There is a way to harness the working capital trapped in unpaid invoices. Known as invoice finance, there are two main mechanisms for freeing up your company’s cash flow.
Factoring has been around for many years as a cash management tool for businesses. Factoring is not a loan.
Invoice Finance is where businesses sell trade receivables (outstanding invoices payable) to the value of the amount the client would like to borrow at a discount to the Factor (Financier). This should be between 50-90 % of any invoice value depending on the agreed criteria with the client.
The factoring company then collects the whole invoice payment on your behalf from the original customer. The invoice balance is then forwarded to your business, less a deduction of a service fee and the cost of funds.
Invoice Discounting (sometimes known as Confidential Invoice Discounting) acts in a similar way to Invoice Factoring. Lenders advance cash sums to businesses based on a percentage of its sales invoices. The cash advance is then repaid when the proceeds for the sales have been recovered.
Your company retains control of its sales ledger and will still have to chase all invoices for full payment. When the customer pays the invoice in full, a pre-agreed percentage of the invoice total is paid to the lender in fees.
Pros & Cons
The main advantage of both invoice discounting and factoring is that the business is able to maintain a stable cash flow. This predictable income gives the business the best chance to implement development plans successfully and with the finance being directly linked to the level of sales activity, the available cashflow will increase as your business grows.
Another advantage of factoring for some companies is that the sales ledger is outsourced. This might suit SMEs who do not have the staff capacity to chase overdue invoice payments. Invoice discounting might be more suitable for a business that prefers to maintain ongoing customer communication and have a confidential facility.
Unlike business loans and overdrafts which are set at fixed amount, one of the benefits of Invoice Discounting is that the level of funding that can be borrowed grows with the business.
In order to ensure your business is attractive to the lenders you will want to consider points such as your ability to assure the lender of the credit worthiness of the businesses and its clients. Lenders may also ask you to have Bad Debt Protection Policy, which will be an additional cost; however, it will protect you and them from bad debt.
Speak To Us
Business Finance Solutions (UK) Ltd is a trusted company that has been operating in this space for many years. With a client focus and relationship-led brokerage model, we take a whole market approach to business financing. We can guide you to the right business finance product from a variety of lenders, and we don’t stop there - we can also provide a tailored ongoing business support package, should you decide you require ongoing support.
Business Finance Solutions (UK) Ltd is authorised and regulated by the Financial Conduct Authority and can offer a free consultation to discuss your finance needs. Get in touch today to find out more.
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