How invoice finance in the UK works in practice
Invoice finance in the UK comes in two forms, factoring and invoice discounting. While both share many similarities, there are key differences making each one particularly suitable for certain businesses or situations.
Before beginning to assess which could be most appropriate for your particular business it is important to understand just how both forms of invoice finance in the UK work.
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Factoring
In factoring unpaid invoices are converted into cash with the obvious benefit for any company’s cash flow. It’s often described as a “full service” option as the lender is generally also responsible for collecting payments from customers.
Taking it step by step
- When you issue an invoice copy is sent both the customer and lender.
- The lender will then pay you up to 95% of the value of the invoice, or whatever level has been agreed. The money is usually paid within 24 hours of the invoice’s issue.
- It is then the lenders responsibility to collect payment from the customer.
- When payment’s received the lender pays the remaining balance, having deducted the agreed fee.
The benefits of factoring
- It allows you to get the cash which you otherwise might have to wait up to 60 days to be paid
- It saves time which you might previously have spent chasing payment from customers.
- There’s no need to use any asstes as security as your invoices are treated as assets
- Lenders are highly experienced in helping businesses to achieve their aims and can offer invaluable advice on strategy.
The cost of factoring
This is determined by the percentage which a lender charges on each invoice that is issued. Different lenders charge different amounts so it is a good idea to get a quote covering a number of providers.
Invoice discounting
Just as in factoring, invoice discounting means a percentage of every invoice you issue is made available to your business almost immediately although the procedure is slightly different.
Taking it step by step
- Your customer and invoice discounting provider each receive a copy of an invoice.
- The provider will then make cash up to the value of up to 95% of the invoice’s value available to you.
- Any cash that is advanced will usually be paid into your bank account within 24 hours.
- It remains your responsibility to chase payment from your customer.
- When it is received you then pay your invoice discounting provider a service fee plus a percentage of the cash you have been advanced.
The benefits of invoice discounting
- Within 24 hours you can bank up to 95% of an invoice’s value
- The more you invoice, the greater the funds you can claim. This is especially useful if your company’s expanding and you need to accelerate the expansion.
- You can cover yourself with optional credit protection against non-paying customers.
- The sooner you agree to pay your invoice provider the better the terms you can negotiate.
The cost of invoice discounting
The cost is split into two – a service fee which covers the cost of administering your account and which can range between 0.01% to 1% of your annual turnover and a finance fee which is a fixed percentage of the funds you draw down. This is generally between 1.5% to 2.5% over the Bank of England base rate.
Touch Financial are experts in invoice finance in the UK ideally placed to source a number of quotes for you, usually on the same day. Simply complete our quote form to compare rates instantly online or speak with one of our invoice finance experts today by calling 0845 388 9725.
