Exploring the different types of invoice financing 

A healthy cash flow is imperative to the ongoing success and growth of any business. Invoice financing helps you to manage your cash flow by bridging the gap between the point at which you make a sale and the time payment is received from the debtor. 

With invoice finance, rather than waiting days or weeks for your invoices to be paid by customers, an invoice finance lender will pay you most of the value immediately. That means you get paid faster for completed work, so you can focus on running your business. Invoice finance is one of the best ways to ease cash flow problems and get paid faster for completed work. 

There are lots of benefits of invoice financing, such as: 

  • Gives you immediate access to cash without a loan 
  • Supports your business growth 
  • Offers a lower-risk option due to the fact that repayments are linked to invoices raised 
  • Offers a funding options that is no risk to your assets 
  • Gives your business access to cash quickly 
  • Reduce your risk of late payments and bad debts 

There are also different types of invoice finance available to your business. We’ll discuss these below, along with advice on how you can find the best invoice finance option for your business.  

 

1. Invoice factoring

Invoice factoring is a form of invoice finance, where an invoice factoring provider lends against your customer invoices. This enables you to receive most of the invoice cash value immediately rather than waiting weeks or months for payment. 

With invoice factoring, payments from your customers will usually go into a bank account controlled by the factoring company, and your customers will be aware that you use factoring.  

The key feature of invoice factoring is that the lender is more closely involved. They will provide ‘credit control’ services to ensure your customers pay on time, which allows you to concentrate on growing your business rather than chasing debtors.  

Factoring providers can also credit check potential customers for you to help avoid bad debts.  

From the lender’s perspective, factoring is lower-risk because they’ll have more control over ensuring your customers pay you on time. This means that if your business has low turnover, a short trading history, or any other challenging circumstances, invoice factoring may be a good option for you.  

2. Invoice discounting


Like all types of invoice financing, Invoice discounting enables your business to gain instant access to cash tied up in unpaid invoices. When you invoice a customer or client, you receive a percentage of the total from the lender. This provides your business with a cash flow boost without having to wait for your client to pay the invoice.
 

Whilst invoice discounting is similar to factoring, there is one fundamental difference. With invoice factoring, your customers may know that you’re using an invoice finance facility. This is because the lender will typically chase any late payments on your behalf. However, with invoice discounting you will continue to deal with all customer communications yourself, and they won’t realise that you’re using an invoice finance facility. For this reason, invoice discounting is sometimes known as ‘confidential invoice discounting’.  

Some businesses like the confidentiality aspect of invoice discounting. However, it’s worth bearing in mind that this type of invoice financing is more hands-on and time-consuming. As a business, you will still have to chase invoices yourself and manage your own credit control, unlike invoice factoring.

3. Selective invoice financing


Selective invoice finance is quite different to the other forms of invoice finance as it doesn’t involve an agreement for the whole sales ledger. Instead, selective invoice finance lets you choose specific customer accounts to finance. You can also use ‘spot factoring’, which allows you to go even narrower and choose specific invoices to finance. Put simply, you can choose which invoices you’d like to finance, and deal with the rest as normal.
 

The benefit of selective invoice factoring is that it’s so flexible: you can take a more ad-hoc approach, and get funding as and when you need it by selling single invoices or choosing a few at a time, depending on your business needs. 

It’s worth noting that selective invoice financing is most suitable for businesses with a healthy turnover and many years of trading history, whereas a smaller or newer business trading with other SMEs will most likely have to look at other forms of invoice finance.  

Invoice financing: how PMD can help 

Whatever facility you choose, invoice finance can be a great way to improve your cash flow situation. An experienced financial facilitator can help you to understand which type of invoice financing is best for your business.  

PMD are experienced in securing invoice finance for clients, and work with businesses across all types of sectors to help facilitate their growth. PMD has access to over 50 invoice financing companies in the Invoice Finance market, and will help to take the hard work out of applying for invoice finance, leaving you free to concentrate on running your business.  

PMD’s dedicated team will take the time to understand your business and find the right funder to support your growth plans. If you have an existing Invoice Finance facility, PMD can benchmark this against what’s available in the market. We’ll improve on this by either reducing costs or increasing funding, and in many cases both. 

Get in touch today to see how invoice financing can help to accelerate your business growth. To stay up to date with our company updates and industry news, follow us on LinkedIn.

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