Factoring, also known as 'invoice factoring' is a type of business finance where money is advanced to you against the value of your outstanding invoices. The factor releases cash against your existing debtor ledger and funds invoices as you raise them.
The factor provides up to 90% of the value of your invoice and makes available the 10% balance as soon as your customer settles their invoice. Essentially, the factor provides a debt collection and ledger management service.
The invoice discounter releases up to 90% of the invoice value whilst you chase your customers
Invoice discounting is a suitable way of drawing money against your outstanding invoices. However, your business retains full control over the management of your sales ledger. It is not just a ‘funding only’ facility as it offers valuable support and credit insurance.
The invoice discounter releases up to 90% of the invoice value whilst you chase your customers. The remaining 10% is made available when your customers pay.
How Invoice finance works?
Invoice finance operates in the following way:
Differences between factoring and invoice discounting
Credit control: Invoice discounting advances cash from your debtor invoices in the same way as factoring – however, the lender doesn’t provide any credit control service to help collect your outstanding payments. Your business is responsible for chasing your customers and collecting payments.
Target market: Factoring is traditionally used by SMEs (including start-ups) with an annual minimum turnover of about £50,000. On the other hand, invoice discounting is suitable for established businesses with a proven track record of trading and an annual turnover of at least £350,000.
Am I eligible for invoice finance?
Your business could qualify for invoice finance (factoring and invoice discounting) if:
Benefits of invoice finance
Making use of factoring or invoice discounting can offer your business the following benefits:
Choosing a lender for either factoring or invoice discounting could be a costly mistake. Invoice finance is best offered by a commercial finance broker as they have access to the leading lenders that can fuel growth into your business.
They would then allocate the most suitable lender on their panel, based on your business's needs.
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