Invoice finance is the practice of using your unpaid invoices to securitise borrowing to resolve term cashflow issues. There are two kinds of invoice financing – invoice discounting and invoice factoring.

Invoice discounting means you are responsible for chasing your customers for payment and you retain control of your sales ledger. You also have a level of confidentiality. Because they deal directly with you, they will not know that you have engaged an outside company for a finance solution unless this is a disclosed facility.

Invoice factoring leaves your sales ledger in the hands of a third-party factor who will deal with administration and payment collection on your behalf. Your customer will deal with the factor and therefore they will be aware that you may have issues, and generally details of the factor are disclosed to your client.

It’s a popular method of business funding but there are some issues with invoice factoring of which you need to be aware:

• Your reputation
• Your customer’s reputation
• Invoice verification problems
• Devilish details

Your reputation

The great thing about invoice factoring/discounting is that you can get funding quickly, usually within 24-48 hours of signing your agreement with the factor. That’s fantastic for your cashflow. You solve urgent operation issues quickly.

Clearly, when a third-party factor is dealing with your customers, your customer becomes aware of this.

Your customer’s reputation

If your customer isn’t creditworthy then you will not be able to factor the invoice. So, when you are selecting which invoices you wish to use for invoice financing you will need to take this into account. It’s necessary to undertake some due diligence on your customers first, or things could get unnecessarily ugly. This shows the importance of having a strong credit management process.

If this is the case it may be wise to explore other types of finance.

Invoice verification problems

Factoring companies will probably want to verify your invoices before they will provide you with finance. They will check that the work, product or service was supplied or completed to your customer’s satisfaction? To make sure this goes smoothly you may want to make sure that your customers are happy. At this stage it is entirely possible that your customer may, at their discretion, refuse to verify the invoice. If this happens, the factor company won’t accept the invoice and you will need to negotiate with your client.

In some cases, a company might try and factor an invoice for which the work has not been delivered. You can’t finance an invoice until the work has been completed or the product has been delivered; a factoring company can only purchase an invoice for which the work has been completed.

Devilish details

Make sure you read and understand the terms of your factoring/invoice discounting agreement before you sign it. You need to make sue that those terms match the original proposal you received as part of your quotation from the company. Pay close attention to any hidden fees and charges listed in the agreement that weren’t in the original proposal.

Make sure there are clear and open lines of communication between you and the invoice financer. Taking time to establish clear working relationships will ensure that factoring process runs smoothly, and you get the funding your business needs.

You will also need to remember that your invoice discounter will pay you 70% to 90% of the value of the invoice and you will receive the remainder less any fees when you customer pays the invoice to the discounter. It’s important to make sure you have accounting processes in place that can track this so you can monitor the health of your cashflow and any expenses relating to the factoring.

To find out more about invoice factoring and if it’s the right solution for your business call one of experts today on 0203 327 0567.