Waiting for customers to pay their invoices can significantly inhibit cash flow, something which can be particularly damaging for SMEs. Certain customers may have the luxury of longer payment terms whilst others may just be slow to pay.
Either way, late payments can affect your ability to fund your next project, pay staff or settle your own supplier bills. Time also has to be spent chasing up these payments rather than focusing staff productivity elsewhere.
Overcoming delayed customer payments is now easier than ever before thanks to invoice discounting and invoice factoring.
Both options will enable you to advance a chosen percentage of your outstanding customer invoices, with the remaining balance (minus interest or fees) paid to you once the customer has settled their balance.
The great news is that once you've been approved by your lender, you could receive funds within as little as 24 hours.
So what are the differences between invoice discounting and invoice factoring?
Invoice discounting is available to businesses which already have sufficient credit control, sales ledger and credit checking facilities in place.
You'll retain all responsibility for overseeing these tasks which means that your customers will never know that you're using an invoice financing facility.
Any invoice payments made by your client will go directly into a third party bank account, ensuring that you and your lender are able to quickly access any money owed.
Since you'll still be responsible for chasing outstanding debts, you may want to consider taking on bad debt insurance. This can be a massive help if you find yourself in the position where an invoice has been advanced to you but the customer is unable to pay.
Invoice factoring takes invoice discounting one step further by taking on the burden of chasing outstanding balances by telephone, letters or through legal action if necessary.
Your invoice factoring partner will deal directly with your customer and so they'll be aware that you're using a third party to handle your credit control functions. As with invoice discounting, balances will be paid into a bank account which is administered by a third party for ease and transparency.
Two forms of invoice factoring are available – recourse factoring and non-recourse factoring.
Non-recourse factoring protects in a similar way to bad debt insurance in that you won't be held responsible for uncollected payments beyond an initial excess.
Recourse factoring means that you'll be liable for any money which can't be recovered by your invoice factoring partner and so any advances you've received on an unpaid invoice will need be paid back.
Your invoice finance agreement will either be chargeable in interest, fees, or both depending on which lender you opt for.
Interest is calculated based on the amount that you've borrowed and is usually added to your outstanding balance at the end of each month. The rates are similar to those offered on standard business banking overdrafts.
Fees are effectively charged for managing your credit accounts and liaising with your customers. The amount you pay will be worked out based on the total number of invoices you've raised along with their accrued value.
Capitalise has brought together more than 70 finance partners from across the UK with experience funding businesses across all sectors. Invoice discounting and invoice factoring has become commonplace within SME business models and we can help to match you with a lender that understands your business.
Access invoice finance options today by completing your Capitalise profile online. You'll be able to upload documentation, receive your decision letter, and even add your accountant onto the application should you not have certain paperwork immediately to hand.
Start your funding search today or register for more information on invoice finance for UK businesses by clicking below.