Invoice factoring is a way in which companies can finance cash flow by selling their invoices to a third party (a factor or a factoring company) at a discount.
Invoice factoringcan be provided by independent financial providers or by banks. Around 45,000 companies in the United Kingdom are currently using factoring (ABFA) in the third quarter of 2014.This works in a similar way to factoring, but your company maintains control of customer payments. However, the main difference between the two types of financing is who collects unpaid bills.
With the financing of the invoices, the company requests loans against its unpaid bills. They maintain control of their sales book and are responsible for collecting unpaid sums. With invoice factoring, the company sells its sales book to an external lender (the factor), who collects the unpaid sums. Usually, the company's customers don't know that the company is taking out loans against their bills.
With invoice factoring, the company's customers will normally know this. First, a company that hasn't yet completed an order generates an invoice to receive an advance from its lender. With invoice factoring, money is released and immediately made available to you as soon as your invoices are sent. In addition, this flexible financing solution gives you the freedom to choose whether you want to sell a single invoice from time to time or your entire sales book to a lender at a reduced price.
Let's look at an example of how it works in practice, for a company that finances 35,000 pounds sterling in invoices every month. ChOCcs allows you to manage and track your customers, but bill payments are still made directly to the factoring provider and not to you. The smaller company's invoices are then protected against the larger company's larger invoices. These rates can vary significantly from company to company: the industry sector, business history, and how often you bill can have an impact.
Yes, an assignment notice is added to each invoice and your customers make payments directly to us. These variations may affect the percentage of the sum of each invoice that is delivered immediately and the fees and interest charged. Therefore, factoring and discounting are asset-based types of financing, covered by the general term “invoice financing”, and both share common principles. While loans and overdrafts can give you a cash injection when business is slow, funding invoices depends on your company achieving sales and increasing bills.
With invoice factoring, invoices are sold and the supplier assumes control of the sales book and is responsible for collecting debts. In extreme cases, lenders will even take legal action if necessary. These types of credit monitoring services are a key benefit of factoring. There are many different bill finance providers in the UK, ranging from companies specializing in bill finance to banks and other financial institutions.
Invoice financing can be used throughout your sales book, or you can choose the customers and invoices you want to use for a loan (this is called selective receivables funding). Invoice financing occurs when the lender uses an unpaid invoice as a financing guarantee, allowing them to quickly access a percentage of the value of that bill, sometimes within 24 hours.