Article - The Benefits of Invoice Finance
This article explains the benefits of using invoice finance.
Invoice finance includes a number of different types of facilities, the two broad categories of products are called: factoring (including credit control) and invoice discounting.
These are the key benefits of invoice finance:
- Faster payments - a business doesn't have to wait to be paid by its customers - a prepayment is given by the invoice finance company as soon as the invoice is raised. That could be 85% of the gross invoice value.
- Credit control help - some forms of invoice finance, such as factoring, provide the customer with a credit control service whereby the factoring company undertakes some or all of the credit control function. In such cases, the customer may not need to take on their own credit control staff which can create a large cost saving. It also frees up time if the management were undertaking the credit control themselves.
- Lump sum cash injection - when a business first uses invoice finance there is often an outstanding unpaid sales ledger. The invoice finance company will make a prepayment available against that sales ledger e.g. 85% which releases a large cash injection immediately and this money can be used for any purpose.
- Cost savings - there are a number of components to the cost savings that can be achieved through invoice finance. Firstly if the customer takes a credit control service it can save the employment cost of one or more credit controllers as mentioned above. However, a professional invoice finance company is often faster at collecting invoices and so the debt turn of the business can be improved, creating a further cash benefit. Customers using invoice finance may also be able to negotiate discounts on purchases for early payments that they are now able to make.
- Improved cash flow - as soon as the business raises invoices it receives prepayments against them. In this way, the cash flow of the business improves and the finance grows in line with the growth in the business. This is often not the case with other forms of finance such as bank overdraft which tends to be a fixed amount of finance.
- Confidentiality - if the customer doesn't want their customers to know that they are using invoice finance there are options available that are completely confidential. Either Confidential Invoice Discounting where the customer continues to handle their own credit control and hence client contact or Confidential Factoring where the invoice finance company provides a credit control service but calls and writes in the name of their customer.
- Selective funding - some invoice finance facilities allow you to select particular invoices against which to receive funding whilst others allow you to access funding against all invoices.
- Bad debt protection - another option is to add on bad debt protection (or non-recourse). This can protect you against bad debts as the invoice finance company credit checks your customers and issues a credit limit. Providing you trade within the limit you are protected. Cover can be up to 100% of the invoice values.
The list above demonstrates the wide range of benefits and advantages of using invoice finance. All of these can create peace of mind for people running a business as they no longer have to worry about day-to-day issues such as slow debtor payments, bad debts and cash flow problems.
