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What’s the difference between Invoice Financing and Factoring and which is right for me?

bespoke - November 30, 2020

If your company is in need of a cash injection, you might naturally look at securing a business loan. But it might not be the best means of getting money into your business quickly.

It can take weeks or even months to receive funds from a business loan application, which for some firms is just too long – and that’s if they manage to get approved at all. 

During the pandemic, businesses have needed external funding to arrive quicker than ever having had their cash flow severely disrupted. The UK government introduced the Coronavirus Business Interruption Loan Scheme (CBILS) to do just that, but applicants still found themselves waiting up to a month to get a decision from their bank.

So, before applying for a business loan through the bank, consider whether invoice financing or invoice factoring would provide a better solution to your situation. Invoice financing and invoice factoring are very similar, but have subtle differences which dictate which one is right for your business.

What is invoice financing?

Invoice financing can boost your cash flow by injecting cash against the value of your outstanding invoices within 24 hours.

If your business offers extended credit terms to customers (between 30 and 90 days), invoice financing enables you to receive an advance on these invoices.

When your lender gets a copy of the invoice, they will pay you up to 90% of the invoice value within 24 hours, allowing you to meet your liabilities and stabilise your cash flow. You then pay the lender once the customer has paid the invoice in full.

What is invoice factoring?

With invoice factoring, you can still get up to 90% of the invoice value within 24 hours of sending a copy to the factoring company, again giving you an instant cash injection.

The difference between the two is that invoice factoring involves selling your invoices to the finance company, who will do the chasing and collect the money owed. They will give the remaining amount to you once they’ve retrieved it, minus their fees.

Which is the right one for you?

This largely comes down to whether or not you believe your customers would feel comfortable to have a third party chase them for payment.

For businesses with high turnover and good client relationships, the security and confidentiality of invoice financing is a great benefit, allowing credit control and responsibility for the sales ledger to stay within the business.

With invoice factoring, the finance company will usually have a debt collection service to retrieve payments on your behalf. With this typically comes higher fees (as much as 15% of invoice amount), but these can be offset somewhat by committing to a long-term contract.

Ultimately, it all depends on your individual circumstances as to whether you steer one way or the other. Both bring a multitude of benefits, allowing you to plug financial gaps so that you can focus on fulfilling your business goals.

Find the right solution with Bespoke Commercial Finance

At Bespoke Commercial Finance, you will get honest and frank advice on what we think is the best solution for your business. We pride ourselves on our straightforward, no-hassle service, and you’ll get access to market-leading rates thanks to our extensive network of lenders and the established relationships we have with them.

Let’s have that open conversation today.

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