Invoice finance is a general term which is used to describe a situation when a factoring company lends a business money, based on the value of its unpaid invoices. It allows businesses to get a quick-fire injection of cash, when invoices are late or a business needs a lump sum. A factoring company will advance a business up to around 90% of an invoice’s value, before going out and collecting payment, returning the money they are owed with their own fees deducted, then finally returning the change.

Although only available for B2B businesses, generally invoice finance is a flexible solution for businesses. You work with a factoring company to create a package which suits your business and how you run it. A factoring company will assess the quality of your invoices first, and if deemed good enough, they will push forward and offer you a lump sum. There are also financing companies which specialise in certain sectors, as some businesses don’t deal with invoices in a traditional fashion.

So How does it all work?

Although both factoring and discounting are very similar, they do have some differences, which are key to how the process works.

How does factoring work?

  • The business sends out an invoice to their client for goods or services provided. For one reason or another, that invoice is not paid in quickly and the business needs to raise funds.
  • A factoring company assess the quality of the invoice or invoices, looking at the potential risk involved and the likelihood of payment.
  • If deemed acceptable the factoring company will advance the business up to 90% of the invoice’s value.
  • The factoring company will then chase up the invoice from the original client, collecting in the value of the invoice. The factoring company will collect what they’re originally owed plus their fees, before returning the remaining change.

More often than not, factoring will be used to help businesses who have late paying clients and are struggling with cash flow problems. However, if a business intends to grow or expand, factoring may be used as a means to an end.

How does discounting work?

  • Just like when using a factoring facility, for one reason or another a late or unpaid invoice, affects a business who need that money.
  • Similar to factoring, the factoring company will look at the quality of the invoices and make a decision whether to finance, judged on the risks of the invoices involved.
  • If the invoices in question are accepted the factoring company will advance you up to around 90% of the invoice, typically within 24 hours.
  • The business will then retain full responsibility of bringing in the invoices and debtor collection.
  • Once the invoices in question are received, it is down to the business to repay the factoring company what they’re owed along with their fees.

The primary reason for invoice discounting is to maintain a bit of discretion. However, for larger businesses who have a vigorous in-house credit control procedure can find it easier, as they can maintain more control over their ledger.

cash flow

You can manage cash flow

Most importantly an invoice finance facility helps businesses manage cash flow. Cash is key and bad cash flow is one of the key reasons for businesses failing. Businesses can struggle with cash flow, however, it’s not always down to a bad business model or strategy, usually, it can be down to late paying clients or unpaid invoices. Invoice finance is an excellent solution to this as it enables businesses to get a quick cash injection.

A business might simply need an injection of money to help deal with cash flow difficulties, so it can continue with its day to day trading. Alternatively, if a business wants to grow and expand, but doesn’t want to go down the route of a traditional bank loan, invoice finance can be a welcome change, with no worry of repayment terms or interest rates.

As well as getting a lump sum, invoice finance gives business owners the opportunity to focus on alternative areas of the business. With a factoring company collecting invoices and owners not having a need to collect in late invoices, they can put their effort and energy into improving areas of the business which require care.