You’ve no doubt already heard the terms “invoice financing and factoring” while trying to finance your business. That said, your expertise is in the field in which you’ve opened a business. Unless it’s a financing business, you likely have no idea what those terms mean.
Invoice financing and factoring refer to a specific type of business funding. It’s not the normal kind of business loan, however, it’s similar to a secured loan, but not quite. Like a secured loan, the funding is secured by any unpaid client invoices you have.
So either option allows you to borrow against the perceived value of any unpaid invoices you may have. Invoice financing and factoring go a step further, allowing you to close the gap you have between the invoice date and the due date as long as you’re willing to pay a fee.
Invoice finance isn’t a good fit for everyone. It’s best if you have either an in-house credit control system, or if you’ve outsourced invoice handling.
You receive funds that equal a certain percentage of your outstanding invoices, based on the specific agreement you’ve signed.
This is usually around 90%, though that number may change depending on various factors.
You still have a responsibility to run your company. It’s still your job to collect payments and perform other actions involved in the invoicing process. You still control your companies finances. The collected payment still goes to you. However, you are then responsible for the repayment as well as the fees.
Invoice factoring is the process that should be used if your business doesn’t have in-house credit control.
If you’d like to take advantage of invoice financing but otherwise wouldn’t be able to, invoice factoring is what you want.
The provider will take care of all credit control processes required to do business. When you can’t collect payment from a customer, they can chase them down and get that payment. This helps decrease the amount of time it takes for you to actually get your money.
Not every business owner is comfortable handing over important business functions. It’s a key element of day-to-day operations and it’s risky not to have direct control over it. That said, a new business can get quite a bit of benefit out of handing control over to an experienced professional. A third-party company that knows what they’re doing can collect on invoices at a lightening fast pace.
Benefits A Business Can Get From Invoice Financing And Factoring
The size of the business affects the exact benefits in several important ways. So it’s important to understand what benefits your company will get in specific, rather than a general statement of benefits.
New Start Ups
This process allows new start-up companies to access funds quickly within the first 12 months. It’s an especially potent tool when used this way, given many other forms of financing are unavailable to new start-ups. Many banks and other financial institutes won’t accept a loan request until a company has been in business for at least a year.
Medium Sized Firms
The benefits for a medium sized company are fairly straight forward. This process helps you shorten the time between invoice and payment. When you have the size and reputation required to reach this size then you already have the money. It’s simply a matter of being able to use that money.
When you run a larger company, invoice finance becomes a great low-interest borrowing rate. Rather than concern yourself with accumulated interest or the terms changing suddenly, you agree to the fees up front and they don’t change.
Invoice Finance Processes
Invoice financing has three distinct stages:
First, you issue an invoice for services or products rendered. Once that’s done, you inform the lender how much the invoice was for.
Once that’s done, you’re allowed to borrow funds. When the invoice does get paid, you receive any funds leftover from the borrowing.
You still have to pay the fees, so this might not be as much as you would want.
Remember, invoice financing and factoring aren’t exactly the same things, so you need to decide which one works right for your business.
If you have an in-house credit system, then you’re going to want invoice financing. If you don’t, then you’re going to want invoice factoring.