Invoice Finance is a collective term for financial products that provide immediate access to cash, tied up in unpaid invoices. It allows businesses to release funds which are otherwise tied up in the unpaid invoices. It allows the business to release the value of the sales ledger before the client has paid. This improves liquidity and enables a more consistent cash flow. These types of facilities are particularly good for businesses which operate with long payment terms or have seasonal demand fluctuations.
Invoice Finance can be broken down into two main categories, Invoice Discounting and Invoice Factoring.
Invoice Discounting is a discreet form of invoice finance, this allows businesses to borrow against the outstanding invoices without the client knowing. The business retains control over their sales ledger and are responsible for managing their own credit control processes. The key advantage of invoice discounting is that it provides access to a significant portion of the invoice value immediately, typically up to 90% while maintaining the relationship with the client.
Invoice Factoring unlike invoice discounting involves selling the outstanding invoices to a factoring company. The factoring company then takes on the responsibility of collecting the owed amounts from the clients. The not only provides immediate cash flow but also outsources the management of the sales ledge and credit control.
Invoice Factoring is often more expensive than Invoice Discounting due to the work involved for the lender.