Factoring or invoice discounting?

Factoring and invoice discounting provide an alternative funding option to businesses, either as a stand-alone facility, or as part of a wider, more traditional facility, such as a term loan and/or overdraft.

Essentially, the lender lends against a proportion of the value of unpaid invoices, and in certain cases, this can even extend to unbilled work in progress.

What do the two processes involve?

Both methods generally involve the following steps.

The company and the financier agree:

• the terms of the factoring or invoice discounting arrangement, including the amount to be advanced by the financier against each invoice
• the terms of recourse (being the circumstances where an invoice is rejected/returned to the business)
• the amount of credit notes permitted
• whether the facility is confidential or not
• the rate of interest chargeable on the daily outstanding balance
• the amount of the facility fees (including, but not limited to, any termination fee)

In addition:

• The company sells goods or services to its customers and raises an invoice.
• The financier makes cash immediately available to the company, typically around 75-85% of the value of the invoice, in return for an absolute assignment of the benefit of the invoice (and its proceeds).
• The financier receives the invoice amount either directly from the debtor, or indirectly through the company (on a confidential basis), and deducts an amount equal to the cash paid to the company, as well as the interest payable and the fixed fee.
• The financier pays the remaining balance back to the company.

Conclusion

If you want to find out anything further about this topic then please feel free to call me on 0330 236 9930, 0330 236 9938 or 07961 116321. All conversations will be in strict confidence. You can also email me vee@navigatebr.com.

This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.