{"id":2823,"date":"2020-03-23T17:26:59","date_gmt":"2020-03-23T17:26:59","guid":{"rendered":"http:\/\/localhost\/2020\/swoopMW20\/?post_type=knowledge-hub&p=2823"},"modified":"2024-08-13T19:50:55","modified_gmt":"2024-08-13T19:50:55","slug":"invoice-factoring","status":"publish","type":"knowledge-hub","link":"https:\/\/swoopfunding.com\/na\/knowledge-hub\/invoice-factoring\/","title":{"rendered":"Invoice factoring"},"content":{"rendered":"\n
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\n \n What is invoice factoring? <\/a>\n <\/h5>\n <\/div>\n\n
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Invoice factoring is a type of invoice finance<\/a>, i.e., a way of borrowing money using your unpaid invoices. Factoring (like invoice discounting<\/a>) 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 \u2013 it is \u2018disclosed\u2019 to your customers.<\/p>\n

Both invoice factoring and invoice discounting<\/a> are types of invoice finance<\/a>. 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 \u2013 they will therefore know about the finance facility. With discounting<\/a>, by contrast, you retain control of your sales ledger, collect payments as normal, and maintain communication with your customers.<\/p>\n <\/div>\n <\/div>\n <\/div>\n

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\n \n Why choose invoice factoring? <\/a>\n <\/h5>\n <\/div>\n\n
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As with all types of invoice finance<\/a>, invoice factoring lets you sell unpaid invoices to a lender in return for a cash advance \u2013 a percentage of each invoice\u2019s value. Once your customer has paid an invoice, the lender pays you the remaining balance minus their fee. In other words, if you\u2019ve issued invoices to your customers and these haven\u2019t yet been paid, invoice finance unlocks this money early. It\u2019s like a secured business loan<\/a>, but instead of using a physical asset like a building as security, invoice finance uses your accounts receivable.<\/p>\n

If you prefer the confidentiality of invoice discounting, you might want to consider confidential invoice factoring<\/a>, 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.<\/p>\n

Unlike commercial overdrafts<\/a> and loans<\/a>, factoring uses only the invoices you raise as security. If you\u2019re a small business with seasonal fluctuations in cash flow, a factoring facility, which is usually whole revenue (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 \u2013 where you can choose to finance specific invoices. There are two main types of selective invoice finance: spot factoring<\/a> and selective invoice discounting<\/a>.<\/p>\n <\/div>\n <\/div>\n <\/div>\n

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\n \n Is it suitable for an SME? <\/a>\n <\/h5>\n <\/div>\n\n
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If you\u2019re a smaller business with a reliable revenue \u2013 but you don\u2019t have in-house credit control or a track record of customers paying on time \u2013 factoring may be a more suitable option, because you won\u2019t need to chase invoices yourself (unlike discounting).<\/p>\n <\/div>\n <\/div>\n <\/div>\n

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\n \n Have you also considered? <\/a>\n <\/h5>\n <\/div>\n\n
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Invoice discounting<\/strong><\/p>\n

Invoice discounting<\/a> 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 revenue as it allows them to secure funding against their entire sales ledger.<\/p>\n

Invoice discounting is confidential, so your customers don\u2019t know you\u2019re using their invoice as collateral. Your company remains in charge of its own credit collection. It\u2019s also considered riskier so your lender may require evidence that your customers pay promptly and you have in-house capacity to chase outstanding payments.<\/p>\n

Spot factoring<\/strong><\/p>\n

Spot factoring<\/a> allows you to borrow money against specific unpaid invoices rather than your sales ledger, so it\u2019s 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\u2019t have the resources to chase outstanding payments and are happy to let a lender take the responsibility on their behalf.<\/p>\n

Confidential invoice finance<\/strong><\/p>\n

Confidential invoice finance<\/a> is a suitable funding option if you prefer your customers to remain unaware that you\u2019re securing finance against their invoices.<\/p>\n

Confidential invoice finance refers to forms of invoice finance that aren\u2019t disclosed to your customers. We\u2019ve already described invoice discounting, but confidential invoice factoring and CHOCs (Customer Handles Own Collections) are other examples of this type of finance.<\/p>\n

CHOCs (Customer Handles Own Collections)<\/strong><\/p>\n

CHOCs<\/a>, 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\u2019re using their invoices to secure working capital.<\/p>\n

CHOCs are suitable if you\u2019d like to maintain a direct relationship with your client or for early-stage companies that don\u2019t 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.<\/p>\n <\/div>\n <\/div>\n <\/div>\n <\/div>\n \n