What’s your business’ most valuable asset? Throwing this question at several entrepreneurs, you would expect to get responses such as equipment, plant & machinery and freehold premises.
However, the largest asset for many businesses, especially SMEs, is often their unpaid sales ledger invoices. In this economic climate, your sales ledger is a financial resource that you just can’t afford to ignore. Many businesses run out of cash, even though they have thousands (and even millions) of pounds owed to them by their customers.
How about a facility where cash is drawn against your unpaid sales invoices? This introduces us to the term invoice finance. It is a facility whereby businesses can release up to 90% of the value of their outstanding sales invoices, usually within 24 hours of raising the invoice. Invoice finance provides flexible funding terms and is usually considered as an alternative to the traditional bank overdraft facility.
Invoice finance is available in several forms: the most common are factoring and invoice discounting. Both facilities release a cash advance of up to 90% of your unpaid sales invoices. You would receive the remaining 10% balance, less any facility charges, once your customer settles their invoice.
Not every business that uses invoice finance wants their customers to be aware of it. Invoice finance could be administered on a confidential basis, where your customers are unaware of a finance provider’s involvement.
Confidential Invoice factoring
This is an attractive option for start-ups and SMEs, as they usually don’t have the resources and in-house accounting systems to effectively chase and collect payments from customers.
A confidential factoring facility releases funding against your sales ledger invoices, but the dedicated sales ledger management function is provided by the factoring company on a confidential basis – the factoring provider chases your customers in the name of your business. Letters and statements will be sent out by the factoring provider using your brand and any calls made will be done using your company name. This creates a seamless link between the factoring provider and your business, which is invisible to customers.
Factoring improves your cashflow, creating additional working capital that can fuel growth into your business. Unlike the overdraft, you do not need to queue up in the banks to renegotiate your credit limit every time you need extra funds – factoring finance grows with your business.
(Confidential) Invoice discounting
Invoice discounting is a particularly attractive option for larger businesses, with a healthy balance sheet and a solid turnover, often in excess of £300k. It is a suitable facility for established organisations with robust in-house and well-run credit control systems.
Invoice discounting is a means of releasing up to 90% of the cash tied up in your unpaid sales invoices. Your business retains control of their credit control function and day-to-day customer contact. Confidential invoice discounting is no different except for the fact that the process is administered confidentially, whereby your debtors are unaware that you are working with an invoice discounter. So, from your customer’s perspective, it’s business as usual.
CHOCs facility
A CHOCs (Client handles all collections) facility is a facility that allows the business to retain control over their sales ledger and debt collection. It is often considered as a hybrid between factoring and invoice discounting and could be an attractive solution for businesses that are not eligible for invoice discounting and wish to save on the costs of paying for outsourced credit control.
With invoice discounting, you notify the lender of the total amount of raised invoices, whereas with CHOCs, you notify the lender on each single invoice. CHOCs is slightly cheaper than the other forms of factoring and there are a very limited number of lenders who offer the facility.
How to access confidential invoice finance?
Every lender will have a slightly different approach to keeping their facilities confidential. That’s why it’s advisable to speak to a commercial finance broker, as they have built relationships with a variety of lenders. They would thoroughly talk you through the range of financing options available to you.
GUEST BLOG: This business advice article was provided by Sema Fongod from Invoice Discounting, the invoice finance specialists.
