Guide to invoice factoring

• Advantages and Disadvantages
• Invoice discounting and debt factoring : How it works
• Export factoring
• How to choose a factoring company

Invoice discounting and debt factoring

Although invoice discounting is very similar to invoice factoring it has a major difference. Whereas with invoice factoring, you give control of your debt book to the invoice factoring agency; with invoice discounting you retain control of your debt book. It is primarily useful for profitable businesses to leverage the value of their debt book to improve cashflow but retain control over chasing debt.

Invoice discounting also tends to be more limited in its scope and where it is offered. It is only available to businesses that sell products and provide services to other organisations and businesses on credit. A company will normally need a proven track record and an annual turnover in excess of £500K.

The invoice discounting process

Before being taken on as an account by an invoice discounting provider, they will first want to evaluate the business, its type of customers and its business process and accounting systems. If this falls within its criteria it will then set a level of lending that will correspond to a set percentage of the total outstanding sales ledger.

A monthly fee will be payable to your supplier of invoice discounting as well as interest on the amount of the sales ledger advanced. These are the fees payable over and above the money lent as an advance of the outstanding sales ledger.

If for example, your agreement allows you an advance of 85% of your total outstanding sales ledger, and the total owed is constantly changing, then the amount you receive will also vary accordingly. If the outstanding debt drops on subsequent months, you will need to repay 85% of the fall in outstanding debt. If the debt increases, you will receive 85% of the increase in outstanding debt. Therefore the amount you owe will always be the same as the amount advanced by the invoice discounting company.

Invoice discounting features

1. As opposed to invoice factoring where you give up your sales ledger, your clients do not need to know you are undertaking invoice discounting
2. More stringent requirements are usually required by the invoice discounting company in lieu of the direct control over the outstanding debt
3. You still undertake the credit control and manage the outstanding debt
4. You will have regular checks from the invoice discounting provider to ensure that your credit control systems and procedures are effective