Invoice financing is a type of finance where you raise capital against unpaid invoices. Unpaid invoices (accounts receivable) are sold to an invoice financing company that pays you a percentage of the invoice value within days. Once your customer pays the invoice you receive the remainder of the invoice minus an agreed fee.
When business growth is being continually hampered by slow payment of invoices, invoice finance can be particularly useful. Instead of you having to wait 90 days to be paid by your customers, you get paid straight away by the invoice financing company. Capital is immediately unlocked and cashflow constraints improved.
There are two main types of invoice financing: invoice factoring and invoice discounting
With invoice factoring, the factoring company or factor takes on the credit control function, dealing with your customers directly to ensure invoices get paid on time. Customers make payments to the factoring company’s bank account.
Particularly when you feel your company is spending too much time on credit control and is struggling to perform the function, invoice factoring can be an attractive solution.
With invoice discounting, your own business continues to carry out credit control, contacting customers to ensure you get paid on time. Customers make invoice payments to a bank account held by the factoring company in your name and are unaware you use an invoice finance facility.