Invoice Financing & Factoring
Businesses can raise money through invoice financing or factoring to obtain cash from unpaid invoices quickly.
Credit is extended based on the creditworthiness of the business requiring funds. This method of financing is generally quicker and less stringent than traditional banking or other sources of finances as it is purely based on the value of the invoices, and because they are asset based, they act as the security for the lender.
By lending against the value of a company’s debtor book or sales ledger, the facility allows the client to get quick access to cash from unpaid invoices sooner rather than waiting for client payment which could range anywhere from 30 to even 90 days depending on payment policy.
The facility can only be used for business to business sales and lenders can release up to 90% of the invoice’s value, typically within 24 hours so it’s ideal to access funds that would previously have been tied up.
Once the invoice is settled by the customer, the lender pays the remaining balance less their fees. The fees are split between a service charge based on the turnover or value of the sale ledger (usually between 0.5% and 1.5%) and any interest charged on the actual amount of any funds borrowed.
Factoring is similar but slightly different. Here the lender will actively manage the sales ledger whereas with Invoice financing, the client retains their control over the sales ledger and any invoice issuing associated with it.
Invoice financing and factoring is quite common in several industries and considered normal practice by customers and suppliers but if this is the first time you are taking part or it’s a new development then remember to communicate to your customers what is happening and how the new arrangements will affect them.
If your business needs to access funds quicker or requires access to additional financing based on their own assets rather than through a traditional banking route then invoice finance and factoring could be the right way forward for you.