Invoice Finance

Invoice Finance is typically considered if your company requires predictable cash flow. There are several types of Invoice Finance but the most common ones are Invoice Factoring and Invoice Discounting. These are both very similar but have distinct differences.

Invoice Factoring

Invoice Factoring in essence allows you to 'sell' some of your invoices to a factoring company. This means that the factoring company will take control of the invoices and therefore they will be the ones directly communicating with your customers in relation to the invoice which means you do not need to do any credit control.

Typically they will pay you around 80-90% of the invoice value immediately. Once your customer pays the invoice then the factoring company will pay you the remainder of the invoice minus the agreed fee. This could be an excellent way of improving your cash flow to allow you to pay suppliers and other overheads.

Invoice Discounting

With Invoice Discounting, it is a similar principle insofar that the discounting company will pay you a percentage of your invoices upfront however the main difference is that they 'lend' you the money and it is your responsibility to ensure the invoices are paid back to you and repay the loan back to the discounting company including a fee to cover costs, interest and risk.

You retain the control of the relationship with your customers but equally it is for you to ensure you are re-paid. This is typically used by larger companies who have a steady and reliable client base.

The key differences between Invoice Factoring and Invoice Discounting:

1. Factoring company purchases the rights of the invoice therefore they are responsible for collecting payment and therefore access to your clients

2. Discounting company will lend you the money and therefore the credit control function remains with you

3. Both types of invoice finance tend to have both Recourse and Non-Recourse options

Which option is right for you?

That depends on the nature of your business, current circumstances and requirements. Another consideration is the size of your business and whether you can effectively manage your sales ledger or if assigning your invoices is right for you and whether it should be on a recourse or non-recourse basis.

It may be that you are only eligible for one or another. Some companies may insist that you have Credit Risk Insurance in place to protect both parties interests. See our section for Credit Risk Insurance.

If you believe the company can trade through its financial difficulties or all it needs is a cash injection then Invoice Finance may be the solution you require.

It is important as a Director, that if you believe your company may be insolvent, then you seek professional support as soon as possible. Do not delay this as it may have serious implications against the Directors.

For help on this and other matters please feel free to contact us.