Factoring

This usually involves transferring your entire sales ledger to the invoice financier, who will pay you a percentage of the invoice value within 48 hours (usually around 85). They then take on the responsibility for collecting the money owed by your customers.

Advantages

• You free up the time you currently spend managing your cash flow to focus on other aspects of your business
• Potential customers will be credit checked by the finance company, so in future you’re likely to trade with customers that pay on time. However, the financier might refuse to accept a potential customer

Disadvantages

• Your customers will know if you use invoice finance, and they might prefer to deal directly with you
• Factoring can affect the image of your company. It could be interpreted that you have a significant cash flow problem

The financier usually keeps a percentage of the invoice value, to pay for their service, so you will lose that part of your income. Usually, there is a final settlement paid to you for part of the remaining balance, after the financier deducts their fees and interest. The exact amount depends on which invoice financier is used, and the creditworthiness of your customer.

Invoice trading

Invoice trading uses an online platform to allow you to obtain finance from individual investors (or groups of investors), in a way that is similar to peer-to-peer lending. It means you don’t have to sell your entire sales ledger to a factoring company.

Advantages

• You get to pick and choose what invoices to sell (so there’s no need to outsource debt collection for the entire sales ledger). For example, if you have one customer that demands very different credit terms, you can choose to trade their invoices alone

Disadvantages

• The customer you want to trade might prefer to deal directly with you
• This type of invoice finance can also affect the way customers perceive your financial strength