How does invoice factoring work?

Invoice factoring is a way to fund slow paying invoices without having to wait for your clients to pay.

Questions often asked include;

What is invoice factoring?

It is a type of invoice finance offered to companies who want raise finance secured on their sales ledger.

Invoice factoring is also known as debt factoring and differs from the other type of invoice finance known as invoice discounting.

The main difference is with invoice factoring a lender will take over control of your sales ledger making payment collections from your clients.

With invoice discounting you maintain control of your sales ledger and will process payments from clients.

With a wide range of lenders specialising in invoice factoring, there are many options for you to choose from.

The differences between lenders are

  • How much you can finance per invoice - up to 90% of the total invoice value
  • Fees - service fees and management fees
  • Eligibility - Your annual turnover and sales ledger value

What are the benefits of invoice factoring?

The main benefit of invoice factoring is having a prompt and consistent income.

Using factoring you do not need to wait for your clients to pay their outstanding invoices.

In addition, you do not need to need to chase and process payments as the lender will take over for you.

In summary the main benefits are

  • Reduced administration - The lender takes over your sales ledger and carries out all the leg work
  • Lower cost - Fees and interest may be lower than some other forms of business lending depending on your company and credit status
  • Pas as you go - You only pay fees for invoices financed

How does invoice factoring work?

When using factoring the lender will take over your sales ledger and oversee collecting and processing payments. Your clients will pay the lender directly.

how invoice finance works

  1. You raise invoices sending them to the lender and your client
  2. The lender will finance up to 90% of invoice total
  3. Clients pays the lender directly
  4. You receive remaining balance less and fees

When using invoice factoring there are two main types available, non-recourse and recourse factoring.

What is non-recourse factoring?

Non-recourse is generally more difficult to get as there is an increased risk to the lender because they will be liable for any unpaid invoices.

In the event of a client failing to pay their invoices the debt is written off by the lender and you are not required to pay back any monies already financed.

What is recourse factoring?

Recourse finance is generally easier to get as you remain liable for any unpaid invoices which is a lower risk for the lender.

If your client does not pay you are required to repay any monies already financed by the lender.

How much does invoice factoring cost?

The cost of invoice factoring varies based on

  • The lender
  • Your credit status
  • Time it takes client to pay
  • Sales volume

Although there are higher fees applied to invoice factoring in comparison to discounting, when using factoring there is less administration making it an ideal option for many businesses.

Mainly those that do not have a dedicated collections team as the lender takes control of your sales ledger.

General fees with invoice factoring are

Finance Interest 1.15% to 4.5%
Service Fee 0.75% - 2.5%

How do you get paid?

When you a client is invoiced the lender will pay you up to 90% of the invoice amount, depending on the terms of your agreement.

The lender is paid directly by the client. The lender will then pay you the remaining balance less their fee.

For example, a client is invoiced for £100,000, you have a facility in place for 90% of invoices and am overall fee of 3%.

The lender will pay you £90,000 in as little as 24 hours.

Your client settles the invoice.

The lender pays out the remaining 10%, £10,000 less the 3% fee of £3,000.

You receive a total payment of £97,000.

Will your clients know you are using invoice finance?

Yes, your client will know that you are using this type of facility as they will pay the lender directly.

If your clients knowing that you are using invoice finance is not a suitable option for your business, then there are other options available to you.

When using confidential invoice discounting, your clients will not know as they will continue to pay you directly.

You need to weight up your options though, as when using confidential invoice discounting you maintain control of your sales ledger and are responsible for managing payments and therefore have increased administration.

What is involved in applying for invoice finance?

  • We can lend to any trading business that invoices on a business to business basis (B2B)
  • You must have a minimum turnover of £100,000 per annum and take a minimum facility of £25,000
  • There is no maximum

When you sign up to an Invoice Finance provider, they will take a first charge debenture over the book debt in the business.

You will raise an invoice to them once issued to the debtor and they will process this within 48 hours of receipt.

Then depending on your facility type, when the invoice has been paid, they will provide you with the rest minus their fee.

You will have a dedicated account manager that will work closely with you and support your business in this transition.

They provide you with an online portal where you can upload your invoices and drawdown on all funds.

Updated: August 08, 2020