Most businesses that sell to other businesses do so on trade terms by which they allow their customers a period of time to pay. As a result many businesses have to wait typically 60 days between delivering their products or providing a service before they get paid. In the meantime they do have an asset by way of Trade Debtors – Invoice Finance is a structured and flexible way of raising funding against this asset.
Types of Invoice Finance
The Invoice Finance Company (IFC) provides funding against the whole of the Client’s debtor book, also known as the ledger, on an ongoing basis. Invoices issued by the Client are assigned to the IFC who also takes over control of the ledger including chasing late paying customers directly. As a consequence a Factoring facility is not confidential. The Clients customers know that their supplier is factoring their debts. Factoring is the most commonly used format of Invoice Finance.
Invoice discounting works broadly like Factoring except the Client is allowed to continue to administer their debtor book. This facility is therefore normally confidential. Invoice Discount is usually only provided to larger companies who can exhibit to the IFC that they are administering their ledger efficiently. If there is a large percentage of overdue debt on the ledger the IFC is likely to insist that a Factoring facility is provided instead to enable them to take over control of the collection of the debts.
This is for clients who need to raise temporary funding, often on a seasonal basis. Instead of an ongoing facility involving the whole ledger a Spot Factoring Company (SPC) will make funds available against perhaps just one or two specific invoices. Once these invoices are paid the borrowing is repaid and the relationship between the Client and the SPC ends.