Invoice financing is a “blanket” term that covers every sort of transaction in which you transfer your unpaid invoices to a third party in exchange for payment. Organisations of many different types participate in invoice financing.
Examples include both traditional financial companies, like banks or specialist investors, and new online crowdsourcing platforms, like Platform Black or Market Invoice.
In the United Kingdom, invoice financing breaks down into two principal groups: factoring and invoice discounting.
The rise of the crowdsourcing approach, where financial resources are provided by groups of investors rather than institutions, has led to much more invoice trading, creating a third significant financing method.
Here are the details (and the potential advantages and disadvantages) of each method.
Using Factoring To Increase Cashflow
In this sort of situation, an experienced financier manages a companies sales ledger and reaches out to customers to collect the money they owe to the business.
Examples of firms that specialise in this service include Calverton Finance and Bibby Financial Services.
The factoring company takes full responsibility for all of the company’s invoices.
There is full transparency between your customers and the invoice financier in this relationship.
Your financier will “purchase” your customer’s debt by providing you with a significant percentage of the total amount owed up front. (This is usually roughly 85 percent of the total amount). It’s then up to the financier to collect in full from your customer.
The remainder of the debt is turned over to your company after it’s been collected less the fees and “discount charge” (i.e. interest) imposed by the financier.
The total cost of this service will depend on the financier’s rules and the customer’s creditworthiness.
Advantages Of Factoring
- You’re putting your sales ledger into professional managerial hands allowing you to concentrate on your own business.
- Your financier vets the credit of potential customers, decreasing the odds of delinquency in the future.
Disadvantages Of Factoring
- Lack of direct customer interaction.
- Your company’s brand may be eroded by conflicts with the factoring company’s behaviour or by the implication that you cannot handle debt collection internally.
This process is similar to factoring, but here online platforms are used to forge a direct link between the company selling invoices and the investors buying them. Without “middleman” financiers you are free to interact with your financial backers directly.
This method has become increasingly popular because it offers much greater flexibility than traditional factoring. It gives you access to financial assistance when you need it without being an “all or nothing” decision like engaging in factoring.
The prevalence of trustworthy online communications and crowdsourcing platforms has made this form of finance feasible thanks to smoothing over the complexities involved in the transaction.
Advantages Of Invoice Finance
- This form of financing involves selling individual invoices rather than your full sales ledger. This allows you to single out “problem” customers that require unusual credit terms and access the financial resources tied up in their invoices without modifying your entire portfolio.
Disadvantages Of Invoice Finance
- Customers selected for trading no longer deal directly with you.
- Your company may suffer similar brand erosion.
This process keeps the financier at arm’s length from the debt collection process.
Basically, money is loaned to the company using unpaid invoices as collateral. The amount of money made available in this way is a pre-agreed percentage of the invoices’ full value, and the company is also obliged to pay the financier fees for its services.
Debt collection responsibilities remain with the company and customers will have no awareness of the discounting process.
This sort of financing is rather like bank overdraft policies. It allows companies to tap a source of short-term funding as necessary; this service is paid for through the fees imposed by the financier.
Advantages Of Invoice Discounting
- Confidential financial arrangements are concealed from your customers.
Disadvantages Of Invoice Discounting
- Your company remains fully responsible for collecting customer debts.
I hope this helps with more ideas how you can increase your companies cashflow for your success.