Invoice factoring
Invoice factoring is a form of invoice financing where a third-party financial institution (known as a factor) buys your unpaid invoices at a discounted rate. This gives you an upfront payment, allowing quick access to cash. The factor then assumes responsibility for collecting the full payment from your clients.
Advantages of invoice factoring
One of the main advantages of invoice factoring is the improvement in your cash flow. By converting invoices into immediate capital, your business gains the agility to meet operational expenses, invest in growth opportunities, and tackle unexpected financial challenges without waiting for payment.
When you choose invoice factoring, you essentially delegate the task of collecting payments to the factor. This can be advantageous, especially if your business lacks a dedicated collections department or if you want to streamline your financial processes.
Tell your clients
It's important to note that with invoice factoring, your clients are informed of the arrangement, as the factor will be handling the collection process. Don’t be too worried about this, it’s a common and widely accepted practice in the business world.
Invoice discounting
Invoice discounting offers a different approach to invoice financing. Instead of selling your invoices to a third party, you use them as collateral to secure a loan from a financial institution. This means you retain control over the collection process, communicating directly with your clients.
Advantages of invoice discounting
One advantage of invoice discounting is confidentiality. Since your clients may not be aware of the financing arrangement, you maintain a direct relationship with them. This is particularly important in maintaining consistency in your communications with your clients.
While you receive a loan based on the value of your invoices, keep in mind that you'll be responsible for repaying the loan along with interest. However, this interest cost is often less than the discount rate applied in invoice factoring.
Invoice discounting also allows for a more customised approach. You can choose which invoices to use as collateral and when to access the funds, providing a level of flexibility that suits the unique needs of your business.
Make invoice financing part of your business strategy
Both invoice factoring and invoice discounting offer viable solutions for small business owners looking to enhance their cash flow.
The choice between the two depends on your comfort level with outsourcing collections, the confidentiality you want to maintain with clients, and the level of control you want over the financing process.
Regardless of the option you choose, incorporating invoice financing into your financial strategy can be a fantastic tool for sustaining and expanding your small business.
One last thing
Using a Business+ Unsecured Overdraft to help you manage your cash flow may be an option rather than invoice financing. It’s a line of credit linked to your Business+ Account and lets you overdraw your account to a pre-approved limit. This helps you pay your bills while your customers pay theirs.
And you’ll receive 100 percent of your invoice amount when they eventually do get around to paying.
An overdraft can also be a better alternative to a small business loan because you’re only paying interest on the amount you’ve spent, not the whole balance. Here’s the Business+ Unsecured Overdraft at a glance:
- Borrow between $10,000 and $50,000
- Pay interest only on the amount you use
- Apply online or in the Business+ app in minutes
- Fast turnaround with no paperwork
If you’re ready to apply for a Business+ Unsecured Overdraft, get started online or in the Business+ app.
For everything you need to know about running a successful business, visit our online Business Hub.
