Invoice Finance and Factoring

  • Anil Kanda
  • 24 Jun, 2011

For any business cash is king. Many profitable businesses fail simply because they run out of cash. Therefore managing the cash available in the business is a crucial activity and one that demands time and attention since events can change quickly.

One way to generate cash in the business is to get paid for your goods and services as soon as they are sold. Many customers expect, demand or are given days of credit before they are expected to pay – that means that your business has to fund the build, delivery and financing costs before getting paid.

But the invoices that you hold are an asset in the business and, as such, can be used to realise cash.

Many companies exist that will provide either recourse (that is where you are liable for your customers non payment) or non recourse funding against the value of your invoices. In some cases it may be possible to raise funds on a single invoice but many companies enter into a larger commitment where all the invoices are sold (or factored) and a percentage of te face value received.

In this case, the lender assumes a range of obligations. In a full invoice factoring arrangement they will assume total responsibility for your businesses sales ledger. They issue invoices, chase payments and collect monies due.

You can elect whether to have a recourse arrangement or not – the difference being that you will be liable for any non payments or bad debts under a recourse arrangement but you will get a higher value for the invoice factored.

In a non recourse arrangement it is the quality of your customer base that determines what you receive as a percentage of full value for the invoices.

Where you wish to retain the full interaction with the customer then simply discounting your invoice to a funder can still raise a significant proportion of the value owed.

Hence, a full invoice factoring operation frees your business form the administrative burden of invoicing and credit control. The amount raised depends upon your appetite for the credit risk of your customers.

Invoice financing simply raises funds based on the value of the invoice. Your business retains full control of the customer relationship – but also bears the cost of performing this function.

Both invoice factoring and invoice discounting generate cash for your business as soon as the invoice is raised to a customer. No funding delay for sixty or ninety days trade credit – cash into the business to help fund continued sales and growth.

This form of business financing has been in existence for centuries. Therefore, the practices and procedures are well understood and there are a number of providers that offer a range of services depending upon your needs. Selecting the right partner can be a challenge but the pay offs for your growing business could be big in these troubled times. Arrangements with providers can last for as long or as short as you decide so there is very few downsides to trying.

As with all financial service providers it is worth doing some initial research first. Using comparison sites can help identify those providers and offers that best suit your need. Of course, there is a cost as there would be with any service provided. But if your business needs cash or is not expert in credit control then utilising invoice factoring may be a sensible way forward.