Finance Guide: Invoice Factoring and Discounting

According to Google, it’s the first day of autumn today. We’re officially in the run-up to the holiday season, probably the most stressful – and exciting – time of year for many small businesses. And that means it’s time to learn about Invoice Finance.

That’s not as much of a non-sequitur as it seems. Small businesses often have a huge increase in activity in the fall and winter, and for many of their suppliers it’s hard to keep up. Sales will be higher come December, but in the meantime businesses must increase production without the added capital from sales. Businesses report that they have difficulty with cashflow during this period, as their clients won’t be able to pay what they owe until they start selling in larger quantities, leaving B2B suppliers stranded. That’s where Invoice Finance comes in.

The details of Invoice Finance

The two most common types of Invoice Finance, Factoring and Discounting, are what we’ll be discussing today.

• Invoice Discounting and Invoice Factoring are ways for businesses to get the money they’re owed more quickly. Instead of waiting 30-90 days to pay off an invoice, a business can pass that invoice to a lender, who will give them a cash advance.  

• The lender will advance 85-90% of a business’s unpaid invoice, and charge a one-time arrangement fee, a monthly fee, and a charge based on the amount of funding the lender advanced.

• Here’s where the two methods differ: with invoice discounting the responsibility for collecting payment stays with the borrower, while invoice factoring means the lender will chase payment. Because of this, invoice factoring is generally preferred by smaller businesses who don’t have the resources to handle collections, while larger businesses with in-house collection teams may choose the smaller fees that come with invoice discounting.

• Both invoice discounting and invoice factoring are short-term methods of funding, with terms usually lasting from 30 to 90 days, matching the invoice term.

• If the business’ buyer defaults on the payment, they could be required to pay the debt they owe the lending institution out of their own pocket. Many institutions, however, offer bad debt protection – if the buyer doesn’t pay, they’ll cover some or all of the money lost.

You can also view and download our SlideShare presentation on this topic here.

Whether you’re a professional advisor researching funding options for a client or a business owner looking for a way to bring in some extra capital, you’ll enjoy our series of Finance Guides – all the information you need in a short and simple package.

Rangewell’s innovative online portal has mapped the entire market of SME finance in order to provide small businesses and their advisors with funding options tailored to their specific needs. If you’re interested in invoice finance, we’ll use our extensive market map, comprising over 200 business lenders and thousands of loan products, to connect you to whichever option suits your situation best.