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Invoice Factoring: The Lowdown

Business finance can be hard to come by these days, even if your small business is in relatively good shape. If you want your business to grow and expand, it’s all important to have access to funding when you need it, and this might not be something that the banks are willing to do. As such, you need to know all your options – and chief amongst these is invoice finance. So, what’s are the invoice finance essentials to get you up to speed? We’re taking a quick look to set the record straight.

What is invoice finance?

Invoice finance is a form of asset-based lending which means money is advanced to your company by a factoring lender, against invoices with your customers. You funding is secured against the value of these invoices. This means invoice finance is viable for the lender as well as being less risky for the borrower.

So how does it work?

Finances can get complicated fast, so in a nut shell here’s how factoring works – it’s not as complicated as you might think!

Step 1: Send your customer your invoice for goods or services provided.

Step 2: Forward on a copy of your invoice to your factoring lender.

Step 3: You can then collect a pre-agreed percentage of the invoice value, normally up to around 90%.

Step 4: If you opt for factoring, then the lender will chase up customer payment on your behalf. With invoice discounting, suitable for medium sized companies, you will retain responsibility for credit collection. Either way, this step is where the customer pays their invoice!

Step 5: The factoring provider credits your account with the balance of the invoice and releases the remaining 10% of the value to you, minus a small lending fee.

So what are the advantages of invoice factoring?

- Improve your cash flow by combatting late payment problems: you can negate problems caused by customers holding up on payment by receiving a substantial amount of funding by factoring your invoice as soon as you issue it.

- You can get an instant cash injection into your business.

- Funding grows in line with your turnover: if you have more invoices to factor, you can raise more money. This is something that bank funding is simply unable to do.

- Factoring lets you take advantage of a full credit control system, taking the strain of payment collection away from your business so you can get on with growing.

- Invoice discounting, on the other hand, lets you retain credit collection duties so you can be as discrete as you like about your use of a factoring service.

Nowadays, invoice finance is an increasingly popular way for growing businesses, including start ups, to get the funding they need. So now you’re up to speed, is invoice financing for you? Fast, flexible and accessible, it’s an increasingly popular choice for many small businesses.


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