Invoice financing, Invoice discounting, Factoring
There are two main types of Invoice Finance, Factoring and Invoice Discounting.
This type of Business Finance is still available despite the reduced risk exposure of the two main Credit Insurers in the market place. This means that you can reduce the exposure that your Business has to its Sales Ledger balances each month and potentially speed up your cash flow to enable you to finance more of your own Business requirements rather than relying on your Bank to provide you with this facility through Overdraft or other Banking arrangements.
If you have not explored this type of Business Finance we would be happy to advise you having talked to you about your individual Business circumstances.
In the context of Confidential Invoice Discounting your Business Clients do not have to know that you have an arrangement to collect your Sales Ledger balances with a third party. They see no discernable difference to being dealt with by your own Credit or Finance department each and every month.
This typically works by the Company seeking finance selling its trade receivables (Sales Ledger Debts), to a Factoring Company. This amounts to a sale of a financial asset and as such isn't strictly borrowing. The Factoring Company will typically pay around 80%-85% of the invoice value up front to the Client, and it then agrees to take on the cost of collection and also the risk of bad debts.
Advantages: The main advantage of Factoring is that it gets around any problems of creditworthiness. Factoring, except
in extreme cases, is open to almost any Company. Using Factoring as a source of finance also removes the risk of bad debts, since the Factoring
Company will have underwritten the risk before agreeing to accept the business.
Disadvantages: The most obvious one is that the Company will only receive a percentage of its Sales Ledger Debts or trade receivables. A guarantee of “cash up front” may sound attractive given the difficulties some firms experience in chasing late payers and bad debts, but giving up to 15% of your trade receivables/Sales Ledger amounts due needs to be considered very carefully.
This can be looked upon as a more cost effective variation of Factoring. Invoice Discounting shares similarities with Factoring as it involves a third party paying your Invoices. However Invoice Discounting means borrowing against the value of accounts payable rather than the sale of invoices. Typically a Company can access short term borrowing of up to 80% of its Sales Ledger.
Advantages: The costs are lower than Factoring since the Company accessing this type of finance only pays interest on the amount
it borrows. It also allows greater flexibility so that Companies can vary the amount of finance they borrow as their needs change.
Disadvantages: Unlike Factoring, when accessing Invoice Discounting facilities, all the risk stays or still lies with the borrower. So the Company concerned will still need to chase its debts and stay on top of its credit control systems. Also tying up a large part of your Sales Ledger as collateral can sometimes mean little left over on the Balance Sheet to borrow against for other requirements.
Henley Business Finance have many other financial solutions available to all areas of business, so if you have any queries regarding your own business finance requirements, or if you would like further information on any financial solution request a call back using the form at the bottom of this page, call us on: 01929 422210 or use our contact form.