What is Invoice Finance – Which is Best for You?

What is Invoice Finance?

Invoice finance allows you to borrow money against your invoices that are waiting to be paid. These can be late, unpaid or lengthy-term invoices.

Invoice financing is commonly referred to as factoring, invoice discounting and spot factoring; however, whilst these are all types of invoice financing, they are all slightly different.

Here, we’ll be outlining the differences between the 4 types of invoice financing we do at Shire Invoice Finance (along with case study examples) so you can see which option might be the right fit for you.

They are:

1. Factoring
2. Invoice Discounting
3. Spot Factoring
4. Selective Invoice Finance

FACTORING

Factoring, also known as invoice factoring, is a financial product that allows your business to raise cash from your outstanding business-to-business invoices.
The factoring company will chase the payments on your behalf.

Business type:
Manufacture and sale of chemicals and cleaning products

Business background:
The business had been trading for a fairly short amount of time, approx. 2 years. Good customer base but not a huge number of customers.

Why the facility was needed:

• Their customers have started to slow down with how quickly they were paying, which was putting huge pressure on the business to pay its bills.
• The business was also struggling with getting invoices paid, so it needed cash and help collecting.
• The factoring facility provided helped with both and relieved the business owners’ stress, allowing them to focus on selling and living life normally!

The reason Factoring was the best option:

The business was struggling with its credit control as it was taking up so much time and taking the owner’s time away from generating more sales and developing its product. By putting a factoring facility in place, the invoice finance company took over chasing invoice payments, freeing up a huge amount of time from the owners.

INVOICE DISCOUNTING

Invoice discounting is a funding-only type of invoice finance, and allows you to raise funds against your unpaid customer invoices.
This option does require you to chase your own invoice payments.

Business type:

Clothing suppliers, manufacturing sportswear for sports teams.

Business background:

Well-established business trading for several years. Has a well-established customer base.

Why the facility was needed:

• Businesses were looking to increase the amount of sales they did with existing customers but knew this would be difficult as they wouldn’t have the funds to pay their suppliers for the goods required (who all require upfront payment).
• By using invoice discounting, the business was able to raise funds against all its outstanding invoices on day one as a lump sum and on an ongoing basis. This way, the business was able to purchase stock in larger volumes and at a lower price, enabling a higher level of sales and a bigger margin.

The reason Invoice Discounting was the best option:

Needed an invoice discounting facility to fund all invoices to all customers. Most customers pay in 60 days, so we needed a facility to help with all customers. Invoice discounting was ideal for this business as they already had a strong credit control function and a good accounting system, meaning they only needed funding and not any help with collecting funds back in.

SPOT FACTORING

Spot Factoring is where you can borrow funds from single or selected invoices.
This is an ad-hoc/pay-as-you-go service.

Business type:

Construction Company

Business background:

Trading for several years – well established but has had its financial problems. I’m looking to get the business back on track this year.

Why the facility was needed:

The business takes on large projects that require large amounts of cash flow at certain times. The business needs access to funding quickly but only occasionally, making spot factoring the perfect solution. As there is no tie-in and nothing to pay when the facility is unused, it is ideal for the business that wants to choose when taking funds.

Why Spot Factoring was the best option:

The business has chunky invoices sporadically, so it wants to pick and choose the ones funded as and when required. The business cash flow is very lumpy, so it only requires funds here and there rather than all the time.

SELECTIVE INVOICE FINANCE
Selective Invoice Finance involves borrowing against certain customers rather than individual invoices, focusing on longer-term or slower-paying customers.

It can be used as a long or short-term solution.

Business type:

Transport

Business background:

A new start – a small company with one vehicle.

Why the facility was needed:

• The business needed cash flow daily to pay for fuel, vehicle costs, and the business owner’s salary.
• The selective facility ensures all jobs can be fulfilled on a daily basis, and that the business owner can take a salary every month, taking away a huge amount of stress!

Why Selective Invoice Finance was the best option:

This business has one main customer, which is a big company and pays on 60-day terms. The company does have other customers, but they all pay very quickly. Funding was only needed against that one customer.

Which one is best for you and your business?

Enquire here or call us on 01827 300 310 to chat with one of our award-winning team!