A profitable business can still struggle for cash when customers pay later than suppliers need paying. Factoring and invoice discounting can release some of the value of unpaid invoices before customers settle them.
The amount available and the conditions depend on the provider, the invoices and the agreement. Treat the arrangement as finance with costs and obligations, rather than as extra sales income.
Factoring or invoice discounting?
With factoring, the provider normally takes responsibility for collecting the invoices covered by the arrangement. That can reduce the credit-control workload within the business.
With invoice discounting, the business normally continues to manage collections. In both cases, finance is advanced against eligible invoices.
Consider whether you need help with collections as well as funding, and how the arrangement will work with your existing records.
Who carries the risk of non-payment?
Under a recourse arrangement, the business retains the relevant risk if the customer does not pay.
Non-recourse arrangements can provide protection against specified bad debts, but the terms and exclusions matter. A disputed invoice, for example, may not be covered. Do not assume that the label guarantees payment of every invoice.
Assess the fit
Invoice finance may help businesses selling on credit, particularly where customers’ payment terms create a gap in working capital. A mainly cash-based business has a different funding pattern.
The provider will assess the business and the quality of its invoices. Availability is not guaranteed simply because invoices exist.
Compare the full cost
Ask for all charges and conditions in writing, including:
- Finance charges and service fees.
- Minimum charges and any ledger-review or withdrawal fees.
- The invoices that must be included.
- Contract length and termination requirements.
- Any security over the company’s debts or other commitments.
Compare the cash released with the total cost and the effect on your margins.
Think about customers and an eventual exit
Outsourcing collections changes who speaks to customers about payment. Discuss the approach and tone, and understand how customers will be told where to pay.
The business can become dependent on early access to receipts. Before signing, consider how you would replace the funding and meet outstanding obligations if the arrangement ended. Security granted to one provider may also affect other borrowing.
Keep invoice, receipt and VAT records consistent with the arrangement. We can help review the accounting treatment and assess whether invoice finance or another funding option better fits the business.