What do you mean by Invoice financing?

What do you mean by Invoice financing?

It is a general term which is used to describe a range of asset-based finance facilities, whereby businesses sell their accounts receivable (invoices) to a third party for a percentage of their value. It is a useful financing tool that is used for businesses and the growth of the businesses is hampered by slow payment of invoices.

Types of Invoice Finance

There are two main forms of Invoice finance and they are:
1.    Invoice Factoring
2.    Invoice Discounting

Did you know about the fact that you can get up to three times more cash with invoice finance as compared to traditional forms of funding? Also that your borrowing power keeps on growing along with your turnover?

How Does Invoice Finance Work?

1.    You continue your business as usual and invoice your clients/customers
2.    The second step is to pass the invoice details to the one who is an agreed provider of invoice finance
3.    Then it is the role of the provider to pay you an agreed percentage (this varies per company), most often within only 48 hours.
4.    Your payment depends on the agreement, depending on the agreement, you will get the payment if that is necessary, or the provider will do that for you.
5.    The last step is to receive the remainder of the invoice amount once the invoice is paid, minus any agreed service fees.

Single and Selective Invoice Finance

Just the way some providers use finance for their whole sales ledger, similarly it is also possible to arrange it for a single invoice.
Sometimes called spot factoring, single or selective invoice discounting is a facility which is ideal for businesses who relies on fewer invoices of a larger value. In these situations late payment can put a profitable business into a critical situation.
Benefits
●    Invoice financing have more flexibility than business loans or overdrafts.
●    Important decisions like lending against invoices can often be made faster.
●    The funding keeps on growing in-line with the company’s turnover.
●    Typically, you get a greater level of borrowing against the assets.
●    It can also help to reduce the risks of late payments or defaulted invoices.

What are the Costs?

Since it is highly useful, you need to be careful to understand all of the costs, fees and charges levied by the providers, and especially to avoid hidden fees.
The basic invoice factoring and discounting charges are as follows:

Service Charge

Service charge helps to cover management, collections and administration costs. Service charge is put as a percentage of your company’s gross turnover. Typical rates of service charge remains between 0.75 and 2.5%.

Discount Charge

Discount charge is quite similar to the interest payments on a business loan, the discount charge or fee is levied on the money you draw down. The average remains between 1% and 3% over base rate, the discount charge will be calculated daily following the advance of the money. In other words this means that you will be charged more if your customer takes longer to pay.
Discount charges are paid either weekly or monthly, depending on the preferences of the lender.
Requirements & Eligibility
The basic requirements for invoice finance are as follows:
●    Your business trades with other businesses (not consumers)
●    You are a limited company or LLP.
●    You offer industry standard credit terms
●    Some lenders have a minimum monthly invoices sent per month requirement
●    Minimum turnover of £50k