Invoice and Receivables Articles and News
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Frequently Asked Questions
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:
- Discount costs
- Service or management fees (including the minimum service fee which is normally derived as a % of the service fee)
- Audit charges
- Re-factoring charges
- Transactional costs
- 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.
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