Up to 95% of the value of your unpaid invoices (your entire sales ledger)
Depends on the product and on your payment terms (e.g. 30, 60, 90 or 120 days)
A weekly or monthly factoring rate of 0.5-5% of the total invoices, with higher rates for longer factoring periods, plus set-up fee (plus extra for bad debt protection)
Usually within 48 hours
To ease cash flow and to minimise late payment and debt (and to remove the hassle of collecting debt)
Smaller businesses with a minimum turnover (e.g. from £30,000) – some providers will work with new businesses
Invoice factoring is a type of invoice finance, i.e. a way of borrowing money using your unpaid invoices. Factoring (like invoice discounting) is usually used to finance all of your invoices (i.e. your entire sales ledger). The key difference is that with factoring the lender will take over your credit control process and deal with your customers directly – it is ‘disclosed’ to your customers.
Both invoice factoring and invoice discounting are types of invoice finance. The key difference is that with factoring the finance provider takes control of your sales ledger, collects your debts and communicates with your customers. Your customers pay your finance provider directly – they will therefore know about the finance facility. With discounting, by contrast, you retain control of your sales ledger, collect payments as normal and maintain communication with your customers.
As with all types of invoice financing, invoice factoring lets you sell unpaid invoices to a lender in return for a cash advance – a percentage of each invoice’s value. Once your customer has paid an invoice, the lender pays you the remaining balance minus their fee. In other words, if you’ve issued invoices to your customers and these haven’t yet been paid, invoice finance unlocks this money early. It’s like a secured business loan, but instead of using a physical asset like a building as security, invoice finance uses your accounts receivable.
If you prefer the confidentiality of invoice discounting, you might want to consider confidential invoice factoring, which works on the same principle as normal factoring. The only difference is how the lender (i.e. the factoring provider or factor) introduces themselves to your customers. With normal factoring, the provider uses their own name, whereas with confidential factoring the provider acts as your own accounting department, using your company name when communicating with customers. In other words, confidential factoring offers the cash advance and credit control aspects of a normal factoring facility, together with the confidentiality of invoice discounting.
Unlike commercial overdrafts and loans, factoring uses only the invoices you raise as security. If you’re a small business with seasonal fluctuations in cash flow, a factoring facility, which is usually whole turnover (i.e. you have to factor your entire sales ledger), might not be the most cost-efficient way for you to raise working capital. You might instead look at selective invoice finance – where you can choose to finance specific invoices. There are two main types of selective invoice finance: spot factoring and selective invoice discounting.
If you’re a smaller business with a reliable turnover – but you don’t have in-house credit control or a track record of customers paying on time – factoring may be a more suitable option, because you won’t need to chase invoices yourself (unlike discounting).
Invoice discounting is the simplest type of invoice finance. It involves a lender advancing you money against unpaid invoices and charging a fee based on the value. This form of finance is suitable for bigger companies with a relatively high turnover as it allows them to secure funding against their entire sales ledger.
Invoice discounting is confidential, so your customers don’t know you’re using their invoice as collateral. Your company remains in charge of its own credit collection. It’s also considered riskier so your lender may require evidence that your customers pay promptly and you have in-house capacity to chase outstanding payments.
Spot factoring allows you to borrow money against specific unpaid invoices rather than your sales ledger, so it’s also suitable for companies with at least a few large customers. The main difference with selective invoice discounting is that spot factoring is disclosed. You hand over control of the invoices you choose to finance to the lender who collects payment from your customer and forwards your company the balance less its fee. Spot factoring may suit SMEs that don’t have the resources to chase outstanding payments and are happy to let a lender take the responsibility on their behalf.
Confidential invoice finance
Confidential invoice finance is a suitable funding option if you prefer your customers to remain unaware that you’re securing finance against their invoices.
Confidential invoice finance refers to forms of invoice finance that aren’t disclosed to your customers. We’ve already described invoice discounting, but confidential invoice factoring and CHOCs (Customer Handles Own Collections) are other examples of this type of finance.
CHOCs (Customer Handles Own Collections)
CHOCs, short for Customer Handles Own Collections, is a cross between invoice discounting and invoice factoring. As with invoice discounting, you deal directly with your own customers. However, like invoice factoring, your customers pay the lender instead of your company, so they know you’re using their invoices to secure working capital.
CHOCs are suitable if you’d like to maintain a direct relationship with your client or for early-stage companies that don’t qualify for invoice discounting, as long as they can prove they have the in-house capacity to chase outstanding payments. They can also offer a more cost-effective option for companies with lots of small customers.
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