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Invoice Finance: How It Works

In very basic terms, the way invoice finance works is that you can borrow money on the strength of your outstanding invoices. It is carried out in regulated fashion, and you pay them lender both a fee and interest on the sum borrowed until the invoice is paid.

The procedure will vary according to whether you take invoice factoring or invoice discounting, however irrespective of the type of invoice finance we will walk you through the process. Keep in mind that they will be more concerned with their own security than your deal with your old customer down the road.

Once we have found the right funding partner and you have been accepted in principle, the financer will:

  1. Investigate your business and how it operates.
  2. Check out your annual turnover.
  3. Check on the number of customers you have and their average invoice value.
  4. Get a credit report on your customers.
  5. Make sure you have no abnormal invoicing practices.
  6. Make sure that your credit terms to customers are normal for your industry.

The check are standard across the finance industry and will not take any of your time, and will assist us in securing you the most appropriate deal.

The advance that will be given can vary from lender to lender, so once we have selected the potential partners we can then provide more detail on the levels and speed of funding to your business. The majority of facilities that we secure can be implemented as quickly as you need them, and we work to ensure that the turnaround from initial discussion to completion of the facility is as timely as possible.

You will then have to decide whether you want to go with invoice discounting or factoring. If you don't want your customers to know what you are doing, then discounting will be your better choice. If their knowing doesn't bother you, and you don't already have your own credit control staff, then invoice factoring will likely be your better choice.

You then have to decide whether you want the finance agreement with or without recourse. If you need the lowest possible costs then recourse would be better for you, but if you prefer the security of knowing that you won't be responsible for any non-payments of invoices, then non-recourse should be your choice - you will pay a higher fee or interest rate for that, but you will know what you are paying and can budget for it without the possibility of you being faced with returning a payment to the lender for an unpaid invoice.

Once you have come to a decision based upon the type of invoice finance your business qualifies you for and the fees and interest rates quoted, then you might first be offered an advance equivalent to a proportion of your total outstanding invoices. You will initially provide the financer with copies of your outstanding invoices and due dates, or alternatively with a computer file detailing the invoices or your sales books.

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You will then be made an offer for the value of your invoices that will generally be between 80% and 90% of the total invoiced debt. The other 10 - 20% is retained as security for the fees and interest applied, and after these have been deducted, you will be provided with the balance once each invoice has been paid.

According to the type of invoice finance agreed, the procedure will then be:

  1. You satisfy your customer's needs who is then invoiced.
  2. A copy of the invoice is sent to the lender.
  3. The lender pays you an agreed percentage of the invoice value (Average 85%)
  4. You chase up payment when needed.
  5. The customer pays the invoice into an account held by the lender.
  6. The lender deducts the fee, the original amount borrowed and the interest.
  7. You receive the balance (15% less fee and interest).

This applies for invoice discounting. 

For invoice factoring, step D is carried out by the factor, and the customer is instructed to pay the invoice directly to the factor. The rest is the same, although if the customer has payment difficulties, the factor will take whatever legal action is required to recover the debt and charge the costs to you unless you have a non-recourse agreement.

Most businesses find both works well for them, the choice between invoice factoring and invoice discounting being made according to whether or not they are already paying credit control staff.  Some also prefer their customers not be aware of what they are doing, while other inform their customers, even when they have chosen discounting.

There are four options altogether, and between them one will be more appropriate for your situation than then others. It is advisable to discuss your needs for business finance with us prior to signing any agreements, because not only do business owners often know little about the invoice finance options available to them, but there might also be other finance options available to you that might suit you better.

Invoice Finance
Reviewed by
Dave Parker on Jan 08.
Fantastic Service!
"Fantastic service. They really knew their stuff and advised on the best possible solution for us. We are now back on track"
Rating: 5
5 star rating  


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