When businesses rely on invoices to be paid for their services, situations can arise where those invoices aren’t paid for a prolonged period of time, meaning your business could suffer with cash flow.
Payment terms for invoices often vary. They can differ from anything from two weeks to three months, and sometimes longer, so you need to have a plan in place for the period between invoice payments.
Invoice finance is a form of finance that allows you to borrow money against those invoices that customers are yet to pay.
There are two main types of invoice financing – factoring and discounting.
Despite them both being financial services, ways to release tied up funds in unpaid invoices, there are a few differences.
The main difference between the two is down to the control and responsibility of the sales ledger and who it lies with.
With invoice factoring, the funder will take control of a business’s sales ledger and credit control. They will also be responsible for chasing the business’s customers for payment.
With invoice discounting, the business will keep control of the sales ledger and will continue to chase payment from customers the usual way. When it comes to settling the invoices using invoice factoring, the customers will deal directly with the funder. This means that the business’s customers will more than likely find out that the business is using invoice factoring.
If you decide to take out an invoice discounting facility, the business will retain control of its sales ledger and are responsible for chasing payment, so it will deal with its customers directly, meaning the fact that the finance company involved will remain unknown to the customers.
What are the benefits of invoice factoring and invoice discounting?
There are number of advantages to invoice finance.
Instead of waiting for its invoices to be paid by the customers, a lender will advance a business around 90% of the invoice straight away, often within 24 hours.
This will see the business get paid faster for the work it will have done, meaning that the funds can be put back into working capital.
Also, as this form of finance is based on a business’s invoices, the level of funding that will be available to a company will increase alongside its turnover.
Another benefit to invoice factoring is the fact that it will act as a complete credit control and collection service on a business’s behalf. This will enable a business’s decision-makers to continue running their company without taking time out to chase clients for payment.
However, as mentioned, with invoice discounting you will remain in control of your debt collection and sales ledger, so your customers will never be made aware that you have used an invoice finance facility to inject cash into the business.
Can anyone use invoice factoring or discounting?
If a business provides a service or goods to customers and gives them credit terms of a certain timeframe, usually up to 90 days, then this could be a good way of raising funds.
This sort of funding is particularly useful for start-up businesses to get their companies off the ground, or for growing businesses who are looking to re-inject cash back into their companies as soon as they have earned it. On the flipside, it is also a good way for struggling businesses to bridge the gaps between getting their invoices out to customers and receiving payment for it.
When considering which option is best for your business, you will need to look at the size of both your company and your sales ledger management resources.
If your business is on the smaller side, then the sales ledger control service that comes when you use invoice factoring will allow you to concentrate on other things.
However, if your company is a larger business and you have the resources to manage your own sales ledger and debt collection, then invoice discounting may be your better option.
To discuss your invoice finance options, contact one of our invoice finance experts on 0333 444 0221 or email firstname.lastname@example.org.