In simple terms Invoice Finance is a means of optimising your business cash flow. Invoice Financing removes the peaks and troughs of your cash flows and ultimately making cash easier to manage.
Small businesses often overlook invoices as one of the most flexible ‘assets’ within the business. As such, rather than have money tied up in invoices that have yet to be paid, you can receive an initial payment up font (typically 80-85% of the gross value of the invoice). The remainder of the invoice will be paid to you when the customer pays the invoice to the Invoice Finance provider, less the service fee (Typically 1-3%). Your business thereby obtains the majority of the value from its invoices, instantly, without having to wait for the customer to pay.
There are numerous advantages to invoice financing (debt factoring or invoice discounting), but also some potential drawbacks.
Advantages
Factoring provides a large and quick boost to company cashflow. This can be extremely valuable for businesses that are short of working capital. A business that is owed £100,000 may be able to get £80,000 or more in just a few days.
Other advantages:
- As there are many factoring companies in the market prices are usually competitive.
- This can be an extremely cost-effective way of outsourcing your sales ledger while freeing up your time to manage the business.
- It assists smoother cashflow and financial planning.
- Some customers may respect factors more than your business and therefore pay more quickly.
- Factoring companies may be able to give you useful information about the credit standing of your customers and they can help you to negotiate better terms with your suppliers.
- Factors can prove an excellent strategic and financial resource when planning business growth – it is a fast way of gaining working capital.
- If you choose non-recourse factoring you will be protected from bad debts.
- Cash is released as soon as orders are invoiced and is available for capital investment and funding of your next orders.
Disadvantages
Disadvantages Queries and disputes may have to be referred on. For this reason, factoring works best when a business is efficient and there are few disputes and queries.
Other disadvantages:
- The cost associated with the invoice financing will mean a reduction in your profit margins on each order or service fulfillment.
- It may reduce the scope for borrowing as your book debts will not be available as security.
- Factors may want to vet your customers and influence the way that you do business.
- It may be difficult to end an arrangement with a factor as you will have to pay off any money they have advanced you on invoices if the customer has not paid them yet.
- Some customers may prefer to deal directly with you.
- How the factor deals with your customers will affect what your customers think of you. Make sure you use a reputable company that will not damage your reputation.
- You have to pay extra (An insurance policy) to remove your liability for bad debtors.
If you are considering the options of using invoice financing by way of factoring or invoice discounting you might like to try out Cash Forecaster, which has this feature built in.
