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• 05 May

  A Detailed Analysis Of Factoring And Invoice Discounting In the United Kingdom

  

  Detailed Analysis Of Factoring And Invoice Discounting In the United Kingdom

  As a business owner in the UK, you may find yourself in a situation where you need to free up cash flow to maintain operations or fuel growth. In such cases, traditional bank loans may not always be the best option due to their lengthy application process, high interest rates, and the stringent criteria required to qualify. Fortunately, there are other options available, such as invoice finance, which can be a great alternative.

  Invoice finance is a method of funding that enables businesses to unlock the cash tied up in their unpaid invoices. There are two main types of invoice finance – factoring and invoice discounting – each with its own unique features and benefits. In this article, we’ll take a closer look at these two methods, compare the various invoice finance products that are available, and also discuss different types of providers in the UK.

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  Factoring: An Overview

  Factoring is a type of invoice finance where a business sells its unpaid invoices to a third party, known as a factor, in exchange for immediate cash. The factor then takes over the responsibility of collecting payment from the debtor on behalf of the business. Factoring is a popular choice for businesses that need to quickly access cash and also want to outsource their credit control function.

  There are two types of factoring – recourse and non-recourse. In recourse factoring, the business retains the risk of bad debt and is liable to repurchase the invoice if the debtor fails to pay. In non-recourse factoring, the factor takes on the risk of bad debt and absorbs the loss if the debtor doesn’t pay.

  Invoice Discounting: An Overview

  Invoice discounting is another type of invoice finance where a business uses its unpaid invoices as collateral to secure a loan from a third party, known as a lender. The business retains the responsibility of collecting payment from the debtor, unlike factoring. The lender provides a percentage of the invoice value upfront, typically around 85% (but it can be higher in some circumstances), and the remaining balance is paid once the debtor pays the invoice.

  Invoice discounting is a popular choice for businesses that want to retain control over their credit control function and maintain relationships with their customers.

  Comparison of Factoring and Invoice Discounting

  Both factoring and invoice discounting offer a range of benefits to businesses in need of cash flow. Here are some of the key differences between the two:

  • Credit Control: With factoring, the factor takes over the responsibility of collecting payment from the debtor, whereas, with invoice discounting, the business retains this responsibility
    
    
  • Confidentiality: Invoice discounting can be more confidential than factoring, as the business retains control of the credit control function, and the debtor is unaware that their invoice has been used as collateral. However, there are a few providers that offer a confidential factoring service where they conduct the credit control in the name of your company.
    
    
  • Bad Debt Risk: With recourse facilities, the business retains the risk of bad debt, whereas, in non-recourse factoring, the factor takes on this risk (providing you trade within pre-agreed debtor credit limits).
    
    
  • Cost: Factoring can be more expensive than invoice discounting, due to the added value of the credit control function provided by the factor. However, there can be a lot of cost savings achieved when a company uses factoring. For example, they may not need to employ credit control staff which can offset the cost of the facility.
    
    
  • Flexibility: Invoice discounting offers the flexibility to retain your control of the credit control function in-house. However, factoring can often achieve a higher funding level due to the lower-risk nature of a factoring service where the factor is in contact with your customers.

  Comparison of Different Types of Invoice Finance Products

  There are several different types of invoice finance products available to businesses in the UK. Here are some of the most popular:

  • Full Factoring: This involves the sale of all unpaid invoices to a factor, who then takes over the responsibility of collecting payment from the debtor.
    
    
  • Selective or Spot Factoring: This involves the sale of a single invoice to a factor, rather than all unpaid invoices. This can be a good option for businesses that need quick access to cash for a specific project or purchase. This can give the business more control over which invoices are used to access cash and it can also help you control the costs.
    
    
  • Invoice Discounting: This involves the use of unpaid invoices as collateral to secure an advance from a lender, allowing businesses to retain control of their credit control function.

  Comparing Different Types of Providers

  In addition to the different types of invoice finance products, there are also different types of providers in the UK, including traditional banks, alternative finance providers, and specialist invoice finance providers.

  • Traditional Banks: Many traditional banks in the UK offer invoice finance products, but in some cases, they may have more stringent criteria and longer application processes than alternative providers. They may also be able to accommodate larger customers with higher funding requirements. Many people like the idea of using a bank whose brand they recognise.
    
    
  • Alternative Finance Providers: Alternative finance providers are non-bank lenders that offer a range of finance options to businesses, including invoice finance. They may offer more flexibility and faster application processes than traditional banks, but they may also have higher interest rates. In some cases, there may be limits on the size of customers that they can accommodate.
    
    
  • Specialist Invoice Finance Providers: Specialist invoice finance providers are companies that focus solely on providing invoice finance products to businesses. They may offer more specialised services and expertise than traditional banks or alternative finance providers, but again they may also have higher fees. In some cases, they may be able to take a view on businesses that are not able to secure funding elsewhere, particularly if there is prior negative credit history.

  Choosing the Right Provider and Product for Your Business

  When it comes to choosing the right provider and product for your business, there are several factors to consider:

  • Cost: Consider the fees and fees and discount rates charged by the provider, as well as any additional costs such as termination fees or setup costs.
    
    
  • Flexibility: Consider the level of flexibility offered by the provider, such as the ability to choose which invoices to use as collateral, and whether the provider offers selective factoring or spot factoring.
    
    
  • Service: Consider the level of service provided by the provider, including the quality of their credit control function and their ability to provide support and advice to your business. You may be able to read reviews of the service provided, access customer research results or speak to an independent broker.
    
    
  • Reputation: Consider the reputation of the provider, including their track record of providing high-quality service and their level of customer satisfaction.
    
    
  • Stability - Consider the stability of the provider. If they are bank-owned or backed by a substantial concern you might consider them more stable than perhaps a small independent with a limited funding line.

  Conclusion

  Invoice finance can be a great alternative to traditional bank loans for businesses in need of cash flow. Whether you choose factoring or invoice discounting, there is a range of products and providers available in the UK to suit your business’s needs. When choosing a provider and product, it’s important to consider factors such as cost, flexibility, service, and reputation to ensure you make the right choice for your business. With the right provider and product, invoice finance can help your business maintain operations, fuel growth, and achieve its goals.

  Further Information

  You may also be interested to read some of our Research About The Invoice Finance Sector which includes pricing comparisons from mystery shopper exercises and customer satisfaction research.

  By Glenn Blackman