Invoice Finance UAE – At the Forefront of Global Trade
Invoice finance is a common form of business finance where funds are advanced against unpaid invoices prior to customer payment. Invoice finance houses include banks, alternative investment providers and private lenders, used by businesses who trade both domestically and globally. There are two types of invoice financing methods; discounting and factoring.
How to use Invoice Financing for your Small Business
Invoice factoring for small businesses is fairly straightforward. As an example, an end customer might not pay the £100,000 invoice issued to them for up to 90 days, but your company needs the funds in 2 weeks, in order to pay for business expenses and salaries.
What is the difference between recourse factoring and non recourse factoring?
The industry defines the two forms of factoring by risk. Invoice finance is effectively a line of credit obtained on the value of your outstanding sales ledger. Here’s what happens if your debtors fail to pay the invoices after you have financed them.
What is bill discounting and how does it differ from factoring?
Bill discounting, also known as purchase of bills and invoice discounting are all the same type of financial instrument used to provide working capital to small and medium enterprises from invoices raised.
What is the difference between invoice finance and invoice discounting?
Invoice finance is a type of receivables finance, which includes factoring and discounting.
Factoring is present when a business assigns their invoices to a third party and the factoring company has full visibility of the sales ledger and will collect the debts when due.
The customer has knowledge that the invoices have been factored. (This is the typical route a lot of funders offer, however – some can offer Confidential Factoring)
Factoring gives businesses up to 90% pre-payment against submitted invoices
This enables improved cashflow, and reduces the need to wait for payment
The company may receive their funds up to two days after invoices are sent out. Many factoring companies will offer to send money same day (TT Payment, usually carries a charge) or by BACS (Free)
A business can choose a ‘selective’ factoring or invoice discounting facility, dependent on the funder.
Typically, with Invoice Discounting, the borrower will have more control over their ledger. Again – like factoring, there is the option to do this on a completely confidential basis.
Invoice discounting is an alternative way of drawing money against the invoices of a business
The business retains control over the administration of their sales ledger
Invoice discounting usually involves a company reconciling with their invoice financier monthly
With factoring – each individual invoice is uploaded – with Invoice Discounting, a bulk figure is uploaded and then drawn down against with the monthly reconciliations showing where money is allotted to
Under a selective facility a business can opt to factor (i.e. lend) or invoice discount just some of the submitted invoices
A selective facility is a good option if a business needs a certain amount of cashflow guaranteed each month or if one or two customers are good payers.
The main difference between factoring and invoice discounting is that with factoring, a funder will have full visibility of your sales ledger and maintain this by chasing debts on your behalf. Invoice discounting on the other hand, allows you to keep your credit control in house but as we already discussed, it would require a monthly reconciliation with the invoice financier. Naturally, management fees for invoice discounting are usually a lot lower, however a company must demonstrate they have the correct procedures in place to support an Invoice Discounting facility.
How do interest rates work in invoice finance and how much is advanced?
Rather than waiting 30 – 90 days, an invoice financier can pay for most of the invoice amount up front, and the interest rate is the amount charged for this service. Interest rates are often linked to base rates the bank will pay for borrowing money, such as the LIBOR, as well as a management fee.
At first instance, invoice finance lenders can advance around 90% of the invoice amount value up front, whether that be through invoice discounting or factoring. Once the invoices are paid by the end customer, the borrower will be paid the remaining difference, excluding interest rate and management fees. Even if the company has existing finance arrangements such as an existing bank loan or overdraft, invoice discounting or factoring may still work for a business.
Normally, a lender will analyse the business prior to implementing a factoring or invoice finance facility. They may audit the financial records of the business and list the approved customers, and the decision is down to legal and contractual implications such as security and existing lenders.
How much is invoice finance?
The company should always read the offer letter and look at all (including the following) costs:
Service or management fees (including the minimum service fee which is normally derived as a % of the service fee)
Notice period for ending service and associated fees
Annual service costs
Trust account costs
Additional costs for services such as credit protection
What is needed for invoice finance?
There are three parties involved directly in invoice finance:
the funder who advances money against the invoice or receivable
the business (or customer) who sends out the invoice
and the debtor who is required to pay for the invoice
A brief explanation: The receivable, associated with the invoice for services or goods acts as an asset and provides the company the legal right to collect money from the debtor. A percentage of funds are then advanced against the value of the invoice.