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

Factoring
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
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.

Spot Factoring
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.

How does it work?

In all three formats of Invoice Finance the IFC/SPC will make funding available to the client normally based on 85% of the total amount of the debtors or the specific invoices involved in the case of Spot Factoring. So in a very simple example a client with a debtor ledger of £100k will normally have funding of £85k made available to them. However, the facility is flexible in so much as the client decides how much of this funding they use and they will only pay interest on funds drawn down. Funding is accessed by the client by transferring funds from their Invoice Finance Facility to their bank account.

Once the debtor pays up, the balance of the debt (less charges), is made available to the client, i.e. the additional 15% in the case of an 85% advance rate facility.

Key Benefits

• Significantly improved cashflow. You have access to funding upon issue of invoices rather than having to wait for your customers to pay.
• Interest is only paid on amounts drawn.
• For Factoring clients, responsibility for administration of the ledger and collection of debts passes to the IFC. In most cases this results in faster collections and also a potential to reduce payroll costs as you no longer require in house staff to perform this function.
• Invoice Finance works particularly well for expanding businesses. Increased turnover produces a larger debtor book which in turn produces more funding for working capital.
• Protection against bad debts.

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