What is invoice finance/factoring/discounting?
Invoice factoring and invoice discounting both help ambitious companies expand and grow. 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 to free up capital tied up in invoices with long remittance terms.
Factoring and invoice discounting, have become a major source of working capital finance since the restriction of bank financing, as a result of the credit crunch. Invoice finance is more attractive to a bank because it depends on the collateral of the invoice due from the debtor. New, post-credit crunch bank capital regulations have resulted in banks transitioning companies away from unsecured loans and overdrafts and on to this mode of lending.
How traditional invoice finance and factoring works
Invoice Financing in the UK
The UK has the highest penetration of factoring or invoice discounting in the world at c.12% of GDP. Despite invoice discounting now being a major source of working capital financing, MarketInvoice offers a number of advantages over traditional invoice finance.
Advantages over traditional invoice finance
The following points highlight some of the advantages over traditional invoice finance and invoice discounting:
- No contractual locks-in: small companies do not have to sell all invoices
- No expensive ongoing service fees
- No requirement for high initial arrangement and take-on fees
- No need to switch off the facility with little or no warning
- Factoring providers aim to minimise their own risk and factoring can therefore be onerous on the recipient of funds
- More favourable terms and conditions
- Finance over single invoices rather than excluding certain debtors
- No strict, arbitrary funding limits
- Traditional financing and arrangements such as factoring are no longer the best options the market has to offer to raise working capital as the terms are rigid and costly.
MarketInvoice: An online invoice finance solution
- Factoring facilities are traditionally whole-turnover
- The entire sales ledger of a company must flow through the factor
- This can become expensive and not reflect the most cost effective solution for companies to raise their working capital
Different types of invoice financing
There are many different types of invoice financing that can affect how efficiently businesses can obtain working capital. Below are a number of examples:
Confidential invoice discounting is an area of invoice financing that can be arranged confidentially, so that customers and suppliers are unaware that the business is being advanced capital against sales invoices before payment is received.
In the case of invoice discounting many companies do not assess individual debtor accounts, but protect themselves against the insolvency of debtors by relying on a good spread of the business and a provision to protect themselves against undue concentration of a large proportion of sales on individual debtors.
Selective invoice discounting, like spot factoring, is where single receivables are sold to a third party. Factoring facilities are traditionally whole-turnover, whereby, the entire sales ledger of a company must flow through the factor.
MarketInvoice offers Invoice Discounting on a flexible and cost-effective basis, allowing businesses to unlock the cash in their invoices within 1 to 2 days.
MarketInvoice offers a new, innovative take on invoice discounting, whereby businesses can sell individual invoices in a flexible process puts them in control as never before.
Find out how your business could benefit by checking out how MarketInvoice works.