Invoice Finance Overview

Invoice Finance has been described as “a cashflow solution that grows with a business” and in this statement it describes, very succinctly, the benefits that this kind of finance offers. It provides cash when a business needs it and smoothes out the peaks and troughs which can affect every business

As its title suggests, Invoice Finance involves using outstanding invoices to raise money for a business which has agreed to work with a lender. In this way, invoices are regarded as an asset for the company against which the agent will lend.

The lender agrees to pay the business a percentage, usually up to 95%, of all outstanding invoices as soon as they are submitted, with the balance being payable when the invoice is paid in full. For doing this they make a service charge related to the size of each particular invoice.

For the business it means that they have immediate access to cash, for the lender it means that it is able to advance that cash against the security of knowing that it is money which is owed to its customer.

There are two kinds of Invoice Finance: factoring and invoice discounting. Both work on the same principle but there is one key difference.

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Factoring

In factoring, when a business issues on invoice it sends a copy both to its customer and to the lender. The lender advances the agreed percentage of the invoice and it then becomes the lenders responsibility to chase payment from the business’ customer. It’s regarded as a “full service” solution and is generally used by smaller, newer companies who need ready access to cash in order to fund their growth.

In smaller companies, where there will be fewer staff, this full service aspect may prove especially useful in taking away the burden of having to spend time chasing invoices. This could result in the customer actually saving time and money as they don’t have to invest in headcount, expensive management systems or time in managing the sales ledger, chasing payment from the debtors etc.

Factoring can also operate as a confidential service whereby payment is chased and collected under your business name. However, some businesses like to distance themselves from the payment collection process and say it is outsourced. This can sometimes result in receiving payment quicker.

Invoice discounting

Invoice discounting follows exactly the same principle as factoring but various differences make it more suitable for larger companies who are looking for a more cost effective way of borrowing than approaching their bank or other lenders.

Whereas, in factoring, the factor takes responsibility for getting payment from the customer, invoice discounting leaves this to the business. Many find this a better solution as it keeps the relationship discreet between the business and the invoice discounter and has no effect on the business customer relationship.

As the invoice discounter does not receive payment directly this changes the way that the relationship works. The business informs the lender the amounts outstanding on invoices and then advises on how much they are prepared to lend against this.

The benefits of using a broker

Invoice finance can be a very complex and difficulty service to understand. There is a great benefit in using an independent factoring broker such as Touch Financial to identify the best options for a particular business in its current situation.

As well as being able to provide a wide range of quotes, Touch’s close links with many leading lenders gives access to exclusive offers and deals. In many cases this can also include a no-obligation trial period before a business makes a full commitment.

Independent and impartial advice is also available free of charge as Touch is paid by commission from the lenders when successful introductions are made.

Touch Financial works with a panel of over 20 of the leading names in this kind of finance and is in an ideal position to recommend the best lender who meets the needs of your business.

Rates are available instantly online or from one of our factoring experts who can be reached on 0845 388 9725.

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