Given that this is the case, there tends to be a number of questions that frequently surrounds the notion of invoice factoring, especially from entrepreneurs who are think about this is a funding option for their company.
Consequently, we have put together this guide to help provide answers to the most commonly asked questions regarding invoice factoring.
How does invoice factoring work?
Invoice factoring may work in a way quite different from other kinds of finance, such as overdrafts or loans from your bank, but they do tend to be quite straightforward in nature.
When you provide products and services to your customers, you will receive an invoice. The invoice you receive is then sent to both the customer and the invoice finance company. Your chosen invoice finance company will be a recipient of these funds, and they will then subsequently provide you with up to 90% of the invoice value.
Once the customers has paid the invoice to the finance company, the outstanding balance of the invoice is then paid to you, with any fees for using the services of the invoice finance provider deducted.
One of the biggest advantages for entrepreneurs using this finance method is that it removes the wait involved for having an invoice paid to you.
What is the difference between invoice finance and factoring?
For many people, it can be a little confusing when it comes to what are the fundamental differences between invoice finance and factoring, but prior to considering whether these could be an option for you as a business owner, it is vital you know the differences between the two.
Invoice finance essentially refers to all types of finance.
Why do businesses use invoice factoring?
There are a variety of reasons as to why companies like to use invoice factoring. One of the main factors is related to tackling potential cash flow issues that can arise as a result of a late invoice.
Late invoices can cause major problems for companies, and this is especially the case for small businesses, who will usually have individual suppliers to pay and other monthly costs to take care of.
Having considerable amounts of money tied up in unpaid invoices can make cash flow extremely difficult for businesses, and prevent growth and expansion.
Small businesses and startups also tend to like the fact that an invoice finance provider handles credit control on their behalf. It means that they do not have to spend time investing in resources in order to handle these themselves, such as chasing invoices.
Are there fees for invoice factoring?
Yes, and the ways in which these are charged will depend on the invoice finance provider in question. You will usually find that these are charge at two or three points.
For example, there is usually a service fee (for carrying out collections and various administrative projects). This will be charged on a monthly basis or per invoice.
You will also pay for a finance fee, which works in a very similar way to the interest you would pay on a loan. Other providers could also include a setup fee too.
Prior to choosing invoice factoring as a funding option, make sure you have always verified beforehand exactly all the costs that you will need to pay for the factoring product in question.