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To many, alternative finance options like invoicing factoring or discounting seems like a modern concept, but though first popularised in recent history in the 1960’s in America, the practice has been in existence for at least 4,000 years. Interim financing may have begun even earlier, but there are records of invoice finance in the Babylonian dynasty.

Factoring was a widely documented practice in the Roman and British empires and financed many an organisation through the industrial revolution. Yet, even as a well-established financial practise, there remains mystery and controversy surrounding different types of invoice finance, and what it says about your business..

In businesses across many industries, accessing interim finance can be the difference between sink or swim. From manufacturing to building, freight and distribution to catering and supply, for so many businesses it is necessary to pay overheads or commit to new projects prior to a previous client making a payment and that’s before we get to those who only pay when the invoice is overdue. Imagine what could be achieved instead if every credit sale effectively became a cash sale- this is the benefit invoice finance brings

The need for cash flow finance extends beyond short-term cash flow issues, and can also provide start-ups with much-needed cash at a time they need it most- to promote growth that would otherwise be unavailable to them due to a lack of accounting history.

Investment and growth opportunities that may have had to be allowed to pass by can instead be grasped with the business allowed to thrive and flourish, and invoice finance can also help to weather financial storms and avoid the pitfalls of the UK’s late payment culture that could otherwise sink a vulnerable business.

With so many circumstances where invoice finance is the logical choice for cash flow and interim funding, we wanted to clear up the difference between factoring and discounting and explore which option might be the best one for your business.

Factoring and discounting are based on the same principles and both release funds that are tied up in unpaid invoices. In both cases, money is advanced against outstanding invoices for a fee. The difference lies in who takes responsibility for the day to day credit control and has the responsibility for collecting payment.with both services able to be offered on a confidential or disclosed basis depending on circumstances and the provider.

Let’s start with factoring

Factoring, , provides full-service sales ledger management. What this means for you is that in addition to you drawing against your sales ledger and receiving a pre-payment, the process of managing your ledger and receiving payment from your customers is outsourced to an expert team.

The secret to maintaining positive cash flow, whoever is responsible, is excellent credit control and getting paid in full and on time (see our previous guide to getting paid). A great relationship with your client and their accounts payable department is a large part of that process, and an area we pride ourselves on excelling in. We rely on rapport building, with bespoke in-house collection processes and communication rather than automation.

Outsourcing the accounts receivable process in this way doesn’t mean relinquishing control, because not only do you have remote access to your ledger at all times, we also keep you appraised of any issues with your customers, including disputes and late payment problems.

The lowdown on invoice discounting

Invoice discounting still enables you to release funds tied up in your unpaid invoices, but instead of outsourcing management of your sales ledger, you maintain control over your own credit control process.

Again there are two principal types of invoice discounting – disclosed and confidential. As the titles suggest confidential is just that, as although payments from your debtors will be made into a trust account in the name of you and the funder, your client will be unaware that the account is not your normal bank account.

Just as in factoring, a disclosed facility will involve a formalnotification being applied to your invoices (notice of assignment) which tells your debtor that payments are to be made to the funder as opposed to direct to yourself.

Which option is best for my business?

This isn’t an easy question to answer as each businesses needsare individual to them, and it can be acase of ‘which option am I eligible for’- start up and smaller businesses may not have a dedicated credit control function and as such may not be able to keep on top of the ledger, therefore invoice discounting would not be suitable and many smaller business may prefer in any event to outsource the process, leading them down the factoringroute

Even larger business that appear to have an in house credit control function may not be offered invoice discounting if there is concern over their credit control or the collectability of the sales ledger. . The decision about working with you and in which capacity therefore depends on multiple determinants.

But in essence to be eligible for invoice discounting, you will need to demonstrate robust and effective existing credit control procedures.

Here,  unlike many other funders, the size of your business is not relevant to the offering we will provide, as at Partnership Invoice finance we will work with smaller businesses on a confidential basis, providing their sales ledger procedures are run efficiently – we consider each business and its needs individually.

If you are a smaller or less established business who could benefit from efficient, expert credit control procedures as well as access to working capital tied up in your sales ledger, then factoring is most likely the most beneficial option for you.

In every option, when Partnership Invoice Finance offers you an invoice factoring or discounting arrangement, we also maintain a shadow ledger and provide your business with insights and advice around how your sales ledger is managed. This data can help give you insights into your credit control and help inform decisions and forecasting.

We can work together to find the best solution for you

In all cases, the best way to reach a decision about the most appropriate invoice financing option for your business is to have a confidential discussion about your current procedures and your requirements. In common with most forms of commercial finance, your individual circumstances will influence the services and rates we will be able to offer you.

As the alternative finance market continues to grow and awareness of finance outside the traditional Banking environment expands, more and more businesses are understanding why invoice finance can be a more attractive and accessible form of finance than so called traditional lending. Afacility that grows as you grow without the concern of having to renegotiate each time you need increased funding and with the benefit of outsourced credit control if desired.

So if you offer credit terms to other businesses, and you need access to working capital to achieve your growth targets or commit to the next project – even if you’re a start-up or otherwise face difficulties in securing traditional credit, or just want to outsource your credit control we can probably help.

It’s our goal to help your business reach your goals, and whether you are a start-up, a family business, or a more established organisation we have a solution for you.

Call the team today to find out more.