Invoice Financing

Available from banks and other financial institutions, invoice financing is a way for businesses to raise cash from their sales invoices the moment that they are raised rather than waiting for the customer to pay.



Sometimes known as invoice discounting or factoring, the business invoices their customers for work completed or products supplied in the usual way and submits a copy of that invoice to their invoice financing company who will pay a cash advance for a percentage of that invoice, generally around 80%. On the face of the invoice, there is usually included what is known as a ‘notice of assignment’ which advises the customer that the invoice had been assigned to the finance company and that payment is due to them rather than the original supplier.



When the invoice has been paid, the finance company will pay the supplier the remaining percentage of the invoice, usually around 20%, less any interest and charged for the service. The interest and the charges usually amount to more than would be charged for a standard overdraft facility or loan.



In essence, the finance company is buying the debt to the supplier at a discounted rate and invoice financing can provide going-concern companies with a boost to working capital. At the outset of the agreement, the finance company will normally purchase the outstanding accounts receivable and then purchase on-going invoices moving forward as well.



Depending on the type of agreement, companies can also benefit from the financing company providing credit control services as well and so removing an administration task from the supplier.



Whilst invoice financing can provide an initial cash boost and an on-going cash flow improvement, there are some drawbacks to this type of agreement. Although not necessarily true, some people view a company which is financing its invoicing as one which is suffering from financial difficulties and this can have a negative effect on sales. Invoice financing is also not the cheapest form of finance open to a company and, in some cases, charges and interest can be extremely high.



It should also be borne in mind that not all types of invoices can always be financed. For example, invoices for services in advance, such as annual support agreements, cannot normally be financed. In addition to this restriction, finance companies may impose a maximum percentage of total debtors that one single invoice represents.



The terms and conditions for different finance companies can vary considerably from the percentage of the initial advance on invoices provided, through interest and charges, to the potential requirement for personal guarantees on the agreement from the directors of the company so any business considering invoice finance as a source of working capital would be advised to obtain quotations from several different sources first.