In United Kingdom two types of invoice financing are available, Factoring and invoice discounting. Invoice financing involves a third party that is willing and ready to buy your unpaid invoices. The third party or invoice financier can be an individual or an organization other than a bank. And yes, they will charge a certain fee for purchasing the unpaid invoices.
WHAT IS FACTORING?
Debt factoring is another name for factoring because the invoice financier at the time of purchasing your unpaid invoices assumes the responsibility to collect the money owed by customers. The invoice financier also manages and maintains the sales ledger. This procedure reveals to the customer that you have “outsourced” the responsibility to an invoice financier.
MECHANICS OF FACTORING
The invoice financier receives a discount charge/interest and also levy’s fee for buying the unpaid invoices, collecting the amount from the customer and maintains the sales ledger.
The amount is 85 % of the value of the invoice that is offered by the invoice financier to you.
They assume the responsibility of receiving money and keeping a legal record of the expenses.
Upon receiving the payment from the customer the money is returned to you minus the discount charge and the fee.
ADVANTAGES AND DISADVANTAGES
The immediate injection of cash flow into business when needed the most is the biggest advantage.
Invoice financier is like hiring a firm to manage your sales ledger and also act as a recovery officer.
Customer may not like a third party collecting payments.
Invoice financier cuts into your profits.
Invoice Discounting allows you to manage your sale ledgers and collect the money from the customers. The invoice financier charges a fee and makes an upfront payment to you against unpaid invoices.
ADVANTAGES OF INVOICE DISCOUNTING
Invoice discounting keeps the invoice financier behind the curtain and the customer stays unaware that you have borrowed money against outstanding invoices. This allows you to ensure a comfortable relationship with your customer because you are managing your account.
You maintain control of your sale ledgers and collect debts.
It does not require you to have an asset as collateral to get the money.
More cash is available than a normal bank would sanction.
DISADVANTAGES OF INVOICE DISCOUNTING
Your inability to collect on invoices in a set routine matter is the main drawback of invoice discounting. The invoice financier requires timely repayments as agreed upon and delay due to irregular collections can create an uneasy financial situation.
To protect the investment the invoice financier will add loan protection insurance.
Invoice financier provides cash only against commercial invoices. Public invoices are not considered but payments owed from other businesses.
You need to have an efficient and proven track of credit collection to be given cash against unpaid invoices.
Some invoice financiers may have hidden charges that may have a negative impact on your business.
Easy availability of cash flow could increase reliability on this method that may have a bad influence on business.
Immediate cash flow is good for business-avail it judiously.