What is Invoice Discounting?
What is Factoring?

It works like a bank overdraft linked to your book debts. Your lender allows you to draw down a % ( 75 to 85% usually ) of your debtors every time you raise an invoice you can draw more money and when a customer pays you it reduces the overdraft. The debts all still belong to you and if the facility is truly confidential your customers wont know you are financing their debt. Your funder will agree a preset maximum limit with you but it will usually be much bigger than your bank overdraft and you will have to give them access to you debtor ledger on your accounting software.

Factoring is very similar to Invoice Discounting in the way it works BUT you actually sell your debtors to the factoring company every time You raise an invoice. Each debt legally belongs to them and it becomes their responsibility to chase your customers and collect the money. Its this area that can cause problems going forward and its important you pick a factoring company that will respect your customer Relationships and there are many elements to a deal that you can use to ensure the correct approach.

Most business would prefer Invoice Discounting because it is less intrusive and should be cheaper than factoring as the turnover charge Will be lower as the debtor finance company have to do less of the admin. However your business will need a good profit record and a set net worth before it will be eligible for a CID facility and that set level varies between debtor finance companies.

Invoice Discounting is always the best option as long as you have good customers and a good accounts team, but if you’re not profitable and have a decent net worth in your business you might find it hard to get.

You invoice your customers and then upload the invoice details to a ledger with your invoice finance company who then allow you to draw the pre agreed % usually between 75% and 85%. Your customer pays the invoice by paying into a trust account set up by the finance company and you then are allowed to draw the balance of the invoice less any interest and charges. Because your agreement will run for a minimum twelve months obviously you keep raising invoices and keep drawing funds and repaying them as your customers pay you.

This is the overall agreement which will run for an initial 12 months and will detail the percentage advance that you will be given against your invoices and the overall limit you can draw to against all your invoices. There will be credit limits set against each of your customers and the facility will work like an overdraft but linked to your actual debtors. The more you sell the more cash gets released.

With invoice discounting you don’t sell your invoices or debts to the finance company, you just borrow against them so it will always be with recourse.

The main benefit is the ability to unlock cash and working capital straight after making a sale and delivering your goods. If you are buying on credit and giving your customers time to pay you have the finance to buy more stock and make more sales. You can therefore grow your business more quickly as you will have constant working capital as your sales increase whereas with a business loan or overdraft your facility is fixed and can be very limiting.

There are other benefits such as being able to win more customers by being able to offer better payment terms and negotiating better prices from suppliers by paying quicker are good examples.

The facility works in a similar way to Invoice Discounting except that you as you sell your invoices to the factoring company you have to send all invoices to your customers with a statement on the invoice saying it belongs to XYZ Factors and please pay them not us. You will upload the details of your sales invoices to an online portal with the factoring company then be able to draw the agreed percentage ( normally 75% to 85% ) down by having the money transferred to your business bank account. When your customer pays you will be entitled to the balance less the interest and charges.

If you have a with recourse facility although you sell the legal ownership of the invoice and debt to the factoring company once the invoice hasn’t been paid within the agreed period ( usually 90 or 120 days ) then the debt is transferred back to you to collect or deal with and the money is taken out of your factoring account.

A without recourse facility leaves bad debts as the responsibility of the factoring company and they will pursue your customers for the debt.

There are advantages and disadvantages of each of these options and it depends on your relationship with your customers, how much time you want to spend chasing bad debts and the costs involved either way.

Because you are selling your debtors a factoring facility is easier to obtain as the financial assessment is more about your customers than you. If you are a new start company or a phoenix from a failed business factoring companies will still be keen to take you on board if you have good products or services and a good spread of customers, although you can also get facilities when you might have a small number of larger customers.

It also means you don’t need to have the cost of an accounts person chasing your debtors as the factoring company do this as part of the service.

The biggest benefit is the availability of ready working capital as you make sales by financing those debtors. If your business is growing there is no better way to finance it. There are other benefits as well with reduced accounts staff needs and costs and the ability to give customers better terms and pay suppliers quicker.