Invoice finance comes in two forms: factoring and invoice discounting. For both,cash is advanced to you when you raise aninvoice. The lender pays an agreed percentage of each invoice, with the balance, minus fees,paid on settlement. The difference between
the two is that factoring includes salesledger and collection management. Invoice finance is only suitable for partnerships and companies selling goods or services on credit to other businesses.
Getting invoices paid upfront helps maintain cashflow, which could help to keep you
afloat in a recession. Invoice finance is a cost-effective alternative to overdrafts or bank
loans, and there is often no need for extrasecurity before the money is advanced. However, they’ll want to see sound management processes and, for invoice discounting, an efficient credit control system. Invoice finance lenders will consider most sectors, but some companies are less suitable, such as those that allow the return of goods or take cash payments.
Typically, lenders advance 80-90 per cent of invoice value, depending on the quality
of the debt. If your customers are deemed creditworthy, you’ll get a higher percentage.
For factoring, costs usually range between1-3 per cent of turnover, whereas invoice
discounters usually charge between 0.1-1 per ent. The factoring charge depends on how uch work is involved in the collection of the edger. Some invoice financers may insist on minimum level of turnover for a minimum
fee. The second cost element is the interest harged on what you are borrowing, which can ange from 1.5-3 per cent above the base rate.
An optional cost to consider is bad debt insurance. With a ‘recourse’ facility, if your
clients don’t pay within a specified period (usually 90 days), the lender will reclaim the
money from you. By opting for a ‘without recourse’ service, you’ll be covered for up
to 100 per cent of the invoice value on the default of the debtor.