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What is meant by invoice finance?
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    Invoice finance is a type of financing provided by an invoice finance lender to enable business owners to leverage their unpaid business-to-business invoices and get immediate cash flow. This allows business owners to swiftly access a percentage of their debtor book value, sometimes within twenty-four hours.

    Businesses can choose from various invoice financing alternatives based on their situation and the level of control they want over their unpaid invoices. The two main types of invoice finance are factoring and invoice discounting.

    However, this can be further divided into invoice factoring, selective invoice discounting, debt factoring, accounts receivable factoring, and spot factoring.

    At WIS Accountancy, our finance team provide specialist finance deploying services with and solutions, helping you keep on track. Contact us today.

    What is factoring? 

    Businesses can use this method to generate money against their outstanding invoices. You can borrow up to 90% (depending on the lender) of the value of your invoices from the finance provider.

    They will also handle your sales ledger and collect payments directly from your customers. However, the finance provider will deduct their fees before paying you the remaining balance.

    How does factoring work?

    • Assess the risk of the loan

    The invoice factoring expert will have to examine the risk of providing invoice financing to you (that is, the risk of not receiving full payment). The assessment will take place based on the amount and quantity of your invoices, payment conditions, the industry you’re in, your clients’ creditworthiness and payment history, and your company’s history and track record.

    • Agree on the loan value

    The factoring company will agree on the amount of cash advance you can receive. This is often a percentage of your accounts receivable ranging from 75% to 90%. They will give you a detailed quote that includes the conditions of the contract and their fees. You should receive your payments within twenty-four hours of signing your agreement.

    • Informing customers about the changes

    At this point, the lender will notify your customers that they will be collecting payment for your company’s invoices. They will include information on how to pay them, when to pay them, and where.

    • Payment of the invoices

    When the invoices are paid, the company will send you the remaining balance minus their fees. For example, you had £20,000 in outstanding invoices factored with the factoring firm, and you received an 85% cash advance of £17,000. When your customer pays their account in full, the remaining 15% (£3,000), less the discount charge and service fee, will be delivered to you.

    Costs involved in factoring

    Some or all of the following costs may apply to invoice factoring:

    • Discount charge – this is charged weekly or monthly and is usually between 0.5% and 5% of the loan amount.
    • Service fees – usually a percentage of your company’s turnover.
    • Early payment fees – applies if there is a fixed term agreed for your factoring.
    • Arrangement fees – a one-time fee that should be disclosed in your factoring quotation.

    Advantages of factoring

    • The factoring company manages your sales ledger, meaning you can focus on running the business.
    • Comprehensive credit-checking processes are in place, allowing for the vetting of new customers.
    • They can help you negotiate better terms with your customers.

    Disadvantages of factoring

    • Your customers may not like the fact that you are using a finance company.
    • More expensive compared to invoice discounting

    What if my clients don’t pay?

    If you are concerned about the non-payment of your invoices, you can choose one of the three options below. This will be included in your invoice factoring contract.

    • Recourse factoring – if you choose this option, unpaid invoices are your responsibility, not the invoice factor’s. As the factoring company has a lower risk, the charges will also be less.
    •  Non-recourse factoring – under this option, the factor is liable for any unpaid invoices.
    • Modified recourse factoring – here, the factoring company will take insurance to cover the loss if your clients fail to pay you due to bankruptcy or other serious financial problems.

    What is invoice discounting?

    This is similar to factoring, except your company retains control over invoicing customers and securing payment. If you use the funding, you’ll be charged a fee as well as a discount charge (similar to interest).

    How does invoice discounting work?

    To use an invoice discounting service, you must send an accounts repayable report to the discounting firm. They can then regulate how much money they are willing to lend to your company based on the value of your outstanding invoices.

    The management of your sales ledger and chasing for payment are not included in invoice discounting. Hence, it remains under your responsibility and control.

    Costs involved in invoice discounting

    Invoice discounting fees can include a percentage of your turnover fee, a service fee, and an interest rate on the advance amount.

    Advantages of invoice discounting

    • The confidentiality of an invoice discounting arrangement protects your customer connections.
    • The control over your sales ledger remains with you, so you can manage relationships with key clients.
    • Cheaper than factoring as you handle credit control.

    Disadvantages of invoice discounting

    • Generally, only SMEs and larger businesses with an annual turnover of more than £100,000 are eligible for invoice discounting
    • Invoice discounting companies would seek proof that you have reasonable credit control and a dependable clientele.

    Am I eligible for invoice financing?

    The following are essential prerequisites and eligibility criteria for invoice financing:

    • You have an established business with a trading history with other companies- Typically, invoice financing is only offered to enterprises that trade with other businesses (B2B).
    • You have set industry standard credit limits- Invoice finance companies may reject your application if your clients take longer than 90 days to pay your invoices. This is because they would have to wait for excessive time to receive the money they have loaned you.
    • Availability of detailed and accurate financial statements- The lender will examine your financial statements to get a comprehensive picture of your trading history.
    • Credit ratings of your customers- Lenders will review your customers to see if they have a good record of paying bills.

    Frequently asked questions about invoice financing 

    Is invoice financing a good idea?

    Invoice factoring could be a good idea for any business that wants to release money from their invoices more quickly, improve cash flow or spend less time chasing late payments.

    Is invoice financing risky?

    The main risk of this type of funding is that a business may become overly reliant on it. In addition, if your clients don’t pay on time or you’re experiencing long delays, your invoice finance charges can be high.

    Is invoice finance regulated?

    The invoice finance industry is not currently regulated by the Financial Conduct Authority (FCA).

    What is the difference between invoice financing and factoring?

    In contrast to invoice discounting, which is a loan secured against your outstanding invoices, invoice factoring companies actually purchase unpaid invoices outright.

    What is a loan against an invoice?

    Invoice financing is a way for businesses to borrow money against the amount due from customers.

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