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Invoice Finance comes in two main forms, Invoice Discounting and Factoring.
An excellent method of funding for businesses, Invoice Discounting is ideal for those who have an established trading history.
The business offers all invoices raised, by way of security to a lender. On a day to day basis, the business simply notifies the funder of the amounts raised in customer invoices. When borrowing is required, the lender will make funds immediately available to a pre-agreed percentage of the total outstanding sales ledger. This percentage can be as much as 90% of the total debtor book, perhaps more in some circumstances.
This type of funding is often thought to be the preferred way of funding your debtors, as invoice discounting usually carries the benefit of:-
- Anonymity with your customers (confidential invoice discounting);
- A minimum of reporting requirements to your lender;
- Lower funding costs;
Factoring differs from confidential invoice finance, in so much as:-
- In its purest form the factoring facility is disclosed to your customers (although it is possible to obtain “confidential factoring” – a hybrid of confidential invoice discounting and factoring);
- When seeking funds, you will have notify your factoring lender of the invoices raised on an item by item basis (although this can be automated through your bookkeeping system)
- Your customers are asked to settle your invoices by payment directly to your funder, or to a trust account operated by your funder;
- Your funder will often undertake your credit control on your behalf, which can mean that you are able to reduce or avoid the cost of having to employ someone to do this for you.
- You can obtain “single invoice” factoring arrangements, where you may have only one customer, or you only want finance against one of your customers.
Factoring is often suitable for you if you:-
- Have a smaller or new start business
- Are less able to keep their bookkeeping systems fully up to date
- Have a business which perhaps demonstrates a higher degree of risk to a lender
Finally, it is worth noting that some of these invoice finance lenders will often extend other credit facilities to your business provided that you maintain the “core” invoice finance or factoring facility with them. This can provided additional cash flow assistance if necessary – for example via stock funding or enterprise finance guarantee scheme.
There are now many lenders providing invoice finance services in the UK market. It is therefore essential to utilise an independent firm such as KEY to evaluate the options available, and ensure that you have obtained the best product and terms to match the unique needs of your business.
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