This method of financing is generally quicker and less stringent than traditional banking or other commercial finance solutions 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.
What is Invoice Finance?
Businesses can raise money through invoice financing or factoring, obtaining cash from unpaid invoices quickly.
By lending against the value of a company’s debtor book or sales ledger, invoice finance allows the client to get quick access to cash from unpaid invoices instead of waiting for the 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 (B2B), however it covers any size of business or industry. 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.
How does Invoice Finance work?
Rather than waiting for a customer to pay the invoice, the invoice finance lender will arrange upto 90% of the payment directly to you, usually within 24 hours, allowing you to manage cash flow and continue running your business.
Once the invoice is settled by the customer, the lender pays the remaining balance minus their fees.
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Invoice Finance process example;
- You send an invoice to a customer, and to your invoice finance lender.
- Whilst your customer is arranging payment, which can be up to 90 days depending on your payment terms, your lender pays the majority (up to 90%) of the invoice value directly to you.
- Utilise the funds released from the customer invoice.
- When the customer pays the invoice, the client receives the remaining monies minus interest/fees payable to the invoice finance lender.
What is the difference between Invoice Financing and Factoring?
Factoring is similar but has some key differentiators. With invoice factoring 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 are quite common in several industries and considered normal practice by customers and suppliers, but if this is the first time you are using these solutions 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 or invoice factoring could be the right way forward for you.
Invoice discounting can be a great way to release cash from pending customer payments and allow invoices to become working capital.
In business cash is king and if you’re looking to get the cash flowing, invoice factoring can be a way to release cash from the account receivable from your balance sheet.