There are 2 main types of invoice financing.

– Factoring occurs when the company sells your invoices to a third party (the factoring company) at a discount in exchange for an immediate cash payment. The debt is left to the factoring company to collect and, in general, in the event of default, it is the factoring company that assumes the loss.

– Invoice discounting allows companies to borrow money against invoices before the customer pays them, using the invoices as collateral. Fundamentally, the responsibility for credit control remains with the company.

Advantages

– Invoice discounting and factoring provide a big and quick boost to a company’s cash flow. This can be extremely valuable for companies that are low on working capital. A company that is owed £100,000 can get up to £85,000 in just a few days.
– It can be a cost-effective way to outsource your sales book while freeing up your time to focus on running your business.
– Your business will have more fluid cash flows
– Sometimes customers can pay factors faster than they would pay you
– Major lenders have the latest information on their customers’ creditworthiness and can also help you negotiate better terms with your providers.
– Factors can be an excellent strategic and financial resource when planning business growth; they often have a wealth of industry-specific knowledge and business experience.
– Non-recourse factoring will protect your business from bad debts.
– Cash is available within 24 hours of invoicing for orders and is therefore available for you to use within the business immediately

Disadvantages

– You have to notify the lender of any dispute with customers.
– Although the fees are low due to the fact that the market is competitive, it is inevitably a cost that affects your bottom line
– Your additional debt margin will be reduced since your debtor book will not be available as collateral.
– Factors may want to examine your customers and influence the way you do business.
– It is not easy to terminate a factoring contract, since you will have to pay the money that has been advanced to you in the invoices that have not yet been settled.
– Some customers may prefer to deal directly with a supplier and may be discouraged by using a factoring company.
– You have to take out an insurance policy to eliminate your liability for bad debts