Does your business suffer from having too many unpaid invoices lying around? If so, then invoice factoring might be a good option for you to grab yourself a quick cash injection. In today's guide, we're going to go through some of the basics about invoice factoring. We'll also take a look at its close relative, discount factoring.
What is invoice discounting and factoring?
Invoice discounting and factoring are essentially the same process. Both use invoices as an asset, and allow businesses to release cash that has yet to be paid by clients and customers. Factoring and invoicing is a great way to generate income when there is a problem with a company's cash flow. Both discounting and financing allow businesses to release funds of up to 90 percent of an unpaid invoice. The practices of discounting and factoring have become a lot more popular in recent years. Especially as banks and lenders have been slow in opening up business financing restrictions since 2008.
What's the difference between discounting and factoring?
There is an obvious difference between the two forms of invoice financing. With invoice discounting, a finance company lends you money, but you need to do your books, chase payments, and take care of the invoice. Your customers will not be aware that their invoices are being used for financing.
In a factoring agreement, you get the loan, but you hand over control of each invoice to a third party. They do the chasing for you, so your customers will be aware of your relationship.
Both scenarios will need a payment on your behalf. There are several things you will be charged for. These include arrangement fees, discount fees, and annual review fees. For discounting, this can be a percentage of the amount on the invoice while factoring can cost a little more regarding service charges.
What are the benefits?
While the processes differ slightly, they share the same advantages. These include releasing up to 90 percent of the value of outstanding invoices - sometimes within a working day's notice. You don't need any other assets to secure the loans, either. This makes it a viable choice for many businesses who are suffering short-term cash flow problems.
For invoice factoring, using the third party can free up a lot of your time so that you don't have to chase up your invoices. They will take care of everything for you - and this can help with stubborn customers, too. Essentially, it's like having a credit control service at your fingertips.
Are there any requirements?
There is a criterion involved for invoice discounting and factoring. As you are, effectively, selling debt to a third party, they will want to know that their money is safe. So, you should have a minimum turnover of no less than £100,000 - although some firms might deal with smaller companies. You should also sell your services or products for a reasonable amount, and have trade with other businesses and customers.
In invoice factoring, you might need to hand over a minimum amount of invoices every month - and there may be a maximum allowance, too. You should also be able to prove that the debts are eligible, and can be collected within a reasonable length of time.
We hope this post has highlighted some of the ways that invoice factoring can help your business.