Cash flow finance - supporting your greatest business asset

No matter how full your order book is, no matter how good or unique is your product, no matter how slick your service operates, if there's a cashflow problem, your whole business is at risk. 

How can Factoring and Invoice Discounting Help?

What is it?

Simply put, invoice factoring and invoice discounting finance is the purchase of your company's invoices at a discount. It's not a loan as you do not have anything to repay and as such there is no debt on your balance sheet to affect your credit worthiness. It turns your invoices into cash.

Businesses throughout the country have many requirements for cash. Payroll, recruitment, taxation, plant acquisition, project funding etc. Factoring and invoice discounting provide the cash.

How does it work?

An invoice finance company will provide you with up to 95% of the value of your outstanding sales invoices. So, if your outstanding unpaid invoices add up to £100,000, you will get a cash injection of £95,000. The remaining 5% will be passed onto you when the customer pays.

The difference between Invoice Discounting and Invoice Factoring is that a Factoring Company will chase your customer for payment. With a Discounting Company you retain control of your sales ledger and the facility will be confidential. You can also choose which invoices you wish to be factored.

Recourse factoring

If the customer does not pay the invoice, the factor is able to reclaim the money from you. Because there is little risk to the factor the cost for recourse factoring is less. Non-recourse factoring is more expensive because the factor takes on specified risks, such as a firm disappearing or going bust and not paying the invoice.

What are the costs?

A percentage of the total amount of unpaid invoices ranging from 0.5 to 3% is charged as a service fee. An interest charge is applied to the monies lent by the factor to you and compares favourably with bank overdraft rates. The fee and percentage reflects the risk and is usually higher for newly established businesses

What about my credit worthiness?

Factoring will be based on your customers’ credit worthiness; not yours. Factoring sits at the side of your existing loans and lines of credit.

Choosing a invoice finance company

Factoring and invoice discounting is available from banking and specialist finance institutions. As with any sector of financial services, the choice is vast with different products suited to different customers.

Make sure you are fully aware of all charges and exactly how it will fit in with your business and customer relationships.

Questions to ask are:-

1. What is their performance and track record?
2. What are the procedures and how do they fit into your operation?
3. How does it handle disputes and disagreements?
4. Does the invoice finance company have knowledge of your industry?
5. When choosing a factoring company - are they customer friendly…your customers?
6. What are the agreement exit procedures?

Disadvantages of invoice discounting and factoring

1. It is not suitable for retailers or businesses dealing with the public. It is mainly designed for businesses trading with businesses.
2. Factors may wish to vet your customers and dictate the way your business operates
3. It may be difficult to end your agreement.
4. A poor factoring provider may affect your reputation with customers; choose carefully. Your customer may prefer to deal with you!

Further information about invoice factoring is available from the NACFB website.