Invoice Finance Loans in the UK provide cashflow for your business by releasing value tied-up in outstanding customer invoices. Factoring and invoice discounting are two major sources.
They refer to the same essential process: an asset-based working capital solution that allows businesses to get advances on cash they are due from customers, rather than waiting for those customers to pay. For many businesses, waiting for payment can cause real problems and prevent them from investing in growth. The various forms of invoice finance allow businesses to free up capital tied up in invoices with long remittance terms.
Factoring is the method used by SME firms to release funds immediately on the basis of invoices raised/receivables from the debtors. This is used by firms to get cash to support other business requirements or working capital for business.
Companies sell their invoices at a discount to get funds. This can be on either one large invoice or various smaller invoices. Konnect Financial helps companies to secure funds on single invoices – called spot factoring. This can be difficult when the business is a new start up with no proper accounts, but we can assist to secure funds within 1 day.
Time plays a key role in factoring. Large firms and organisations such as governments usually have specialised processes to deal with one aspect of factoring. They fulfil invoices in 90-120 days and compaies need funds quickly to give financial support to the business. This is where Konnect Financial can help you.
There are risks to factoring
- Counter-party credit risk related to clients and risk covered debtors. Risk covered debtors can be reinsured, which limit the risks of a factor. Trade receivables are a fairly low risk asset due to their short duration.
- External fraud by clients: fake invoicing, mis-directed payments, pre-invoicing, not assigned credit notes, etc. A fraud insurance policy and subjecting the client to audit could limit the risks.
- Legal, compliance and tax risks: large number of applicable laws and regulations in different countries.
- Operational risks: such as contractual disputes.
- Uniform Commercial Code securing rights to assets.
What are the benefits of Invoice Finance loans?
- Access invoice value within 24 hours
- Handle your own credit control and sales ledger management or outsource them to our expert teams
- Remain in control of your funding at all times with our online management system
- Protect against customer insolvency with Bad Debt Protection
- Choose to use our confidential facilities to maintain relationships with your customers
Advantages of Invoice Financing/Factoring
Both kinds of invoice financing can provide a large and quick boost to your cash flow.
Advantages of invoice financing include:
- The invoice financier will look after your sales ledger, freeing up your time to manage your business
- They credit check potential customers meaning you are likely to trade with customers that pay on time
- They can help you to negotiate better terms with your suppliers
Advantages of invoice discounting include:
- It can be arranged confidentially, so your customers won’t know that you’re borrowing against their invoices
- It lets you maintain closer relationships with your customers, because you’re still managing their accounts
Disadvantages of invoice financing
Some disadvantages of invoice financing are that:
- You’ll lose profit from orders or services that you provide
- Invoice financiers will usually only buy commercial invoices - if you sell to the public you might not be eligible
- It may affect your ability to get other funding, as you won’t have ‘book debts’ available as security
If you use factoring:
- Your customers may prefer to deal with you directly
- It may affect what your customers think of you if the invoice financier deals with them badly