Invoice Factoring
Invoice Factoring

Invoice Financing – A Brief Guide


In what follows, we at ACF Direct would like to explain the basic principles of invoice financing and how they might potentially benefit your company.

The problem

Almost every company, from sole traders to multi-national corporate giants, has experienced difficulties at times in getting their invoices paid.

The reasons for that might be many and varied but the effects are always the same if left unchecked – your company can start to become starved of cash flow and find difficulty meeting its own expenses.

Invoice financing is designed to alleviate some of those problems.

Component parts of invoice financing solutions

Invoice financing typically breaks down into two main service areas:

  • invoice factoring;
  • invoice discounting.

This area is usually considered a subset of overall business finance.

How invoice factoring works

In operation, this is intrinsically simple and straightforward:

  • a company, usually called “the factor”, will purchase from you invoices you have raised to your clients;
  • they will pay you a percentage of the total value of those invoices immediately. That can be a big boost to your cash flow;
  • the factor will take over responsibility for securing the balance of payment from your customer or customers. That essentially means them acting on your behalf as your credit control department (though typically in their name);
  • once they’ve recovered the sums involved, they will pass them on to you;
  • as you might expect, there will be fees and charges for using the factor’s services. Those costs will vary considerably, depending on the nature of the company concerned and their charging policies/mechanisms.

The big attraction of the system is that it moves cash through your organisation much faster.

It is necessary though to accept the reality that the activities of your factor will be visible to your clients.

How invoice discounting works

Although at face value there are some similarities, in practice, the mechanisms are quite different:

  • a company will look at total outstanding values of your invoices and offer you a loan against them;
  • when you eventually get paid by your clients, the money will be then sent to them as settlement for the finances they advanced against those invoices to begin with;
  • you will remain in sole contact with your clients and be responsible for collecting your outstanding debts from them;
  • once again, there will inevitably be fees and charges associated with using this type of service.

Invoice discounting can be a relatively easy way of raising finance due to the fact that the lender may see your invoices as an asset. That might make it easier to secure money than would otherwise be the case in some standard business financing operations – subject to the overall status of your business at the time.

Summary

The basic principle of invoice financing, as mentioned above, is that your invoices constitute an asset that you can leverage for financial benefit.

In the appropriate circumstances, the use of these types of services may be extremely beneficial and the costs of using them can be factored into your standard pricing model.

The techniques are well established and have been around for some time, so it might be worth finding out more if you find yourself in the position of being strangled by a lack of working capital due to unpaid invoices.