If you run your own business, you will realise that converting invoices into cash flow can be an extremely painful process.
Invoices are quite often late being paid and need to be chased up. Without money coming into your business in a timely fashion, for the smaller companies your cash flow can just disappear and can potentially stop you from trading.
Depending on your payment terms, you could be waiting 2 to 3 months before you see any money from a sale coming into your business.
In this situation, it is very hard to plan and grow your business. However using an invoice factoring company can help you get a very large percentage of the invoice paid instantly, giving you the instant cash flow to help your business move forward.
How Does Invoice Factoring Work
The basic principle of invoice factoring is where you sell your invoice to the invoice factoring company to instantly receive a large percentage of your invoice paid, typically up to 90% of your invoice value.
The invoice factoring company then process your invoice with your client in the normal way. Once your client pays the invoice then the invoice factoring company (or debt factoring company) pays you the remainder of the invoice.
There will be a charge that comprises of both interest and fees that you will have to pay and very much depends on the company that you select.
With invoice factoring, there is usually an invoice financier managing your company sales ledger and therefore will manage the payment of the invoice and collecting the money from your customer. With this process, your customer will know you’re using an invoice finance service.
As an Example:
An invoice is raised to the value of £10,000, owed by the customer. With invoice factoring, you then sell your invoice for up to 90% of the value (£9000).
When the customer pays the invoice amount, you then receive the remaining invoice amount (£1000). You then pay the invoice financier interest and any fees.
Being Confidential With Invoice Discounting
Invoice discounting is where you manage your sales ledger and collecting the money from your customers. The invoice finance company will just lend you the money against any unpaid invoices, which is typically an agreed percentage of the invoice value along with any interest or fees.
The beauty is that confidential invoice discounting means that your customers are not aware that you use an invoice finance service.
When the invoices are paid by your customer the funds go straight to the invoice financing company, which reduces the amount you owe. You can then borrow more money against new sales invoices up to a value originally agreed.
It’s important to make clear that with invoice discounting, you are still responsible for collecting invoice payments.
I hope that’s helped to explain the benefits of both invoice factoring and invoice discounting to increase cash flow and help your business grow.