For small businesses and those still trying to grow their business from the ground up, it can be extremely difficult to maintain a steady cash flow. Factoring and invoice finance are two possible solutions that should be considered by any business looking for a means of managing their incoming payments without having to take out a loan with a bank.
What is invoice finance?
In the business world, invoice finance is seen as an efficient way of optimising the cash flow of a small or growing business. It helps to even out the peaks and troughs that typically shape the flow of incoming payments, making your cash flow easier to maintain.
In terms of a flexible asset within a business, the value of invoices can often be overlooked, and the idea of factoring invoices or invoice discounting often does not occur to directors of smaller businesses – instead, they are more likely to consider a business loan, which may not always be the best solution with regards to their circumstances.
This is unfortunate, as the option of invoice finance should definitely be considered more often by smaller businesses. Rather than having your money tied up in invoices for which you are still awaiting payment, you can instead speed up the process by looking into invoice finance companies. Potentially, you could receive an upfront cash payment of up to 80% of the total value of the invoice, and then receive the rest of what you are owed when the customer pays the invoice finance provider that you have hired, who in turn take a proportion as their service fee.
By taking this course of action, your business will thereby manage to obtain the majority of the value of your outstanding invoices, instantly, avoiding having to wait for the customer to pay.
What products do invoice finance companies offer?
There are two basic products that fall under the umbrella of invoice finance – invoice discounting and factoring invoices.
- Factoring is more of a ‘full service’ which will provide funding of up to 90% of the value of the invoice upfront, as opposed to 80% with invoice finance. Factoring also provides ‘bad debt protection’ and can include debt factoring which is not included by most invoice finance companies.
- Invoice discounting is more commonly used by medium to large businesses, as it is a more flexible means of generating a cash flow than basic invoice finance. It differs from a factoring product in that your business will have to have its own credit control department, since this will not be taken care of for you.
How do invoice factoring services work in practice?
There are commonly three stages involved in the process of invoice factoring:
- Invoice – Contractual agreements for your client must be fulfilled, whether completion of service or the delivery of goods. Customer should be invoiced as usual.
- Notify – The factoring company must be forwarded a copy of the invoice – usually electronically. They will then calculate the available funds.
- Funding – Up to 90% of the invoice value can be borrowed from the factor.
If you would like a free quote for invoice financing do not hesitate to visit Companeo. They specialise in matching your business with the right invoice finance company or invoice factoring services for you.
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