By Conrad Ford
For businesses struggling to keep cash flow moving, invoices are an often overlooked but potentially very important asset class that can be leveraged to secure short-term funding.
The essentials of any invoice-based finance solution are that a lender provides your company with cash on the understanding that they will receive a proportion of monies received when your invoice is settled. The level of charges involved can vary and the invoices must be issued by one business to another, rather than from a company to consumers. But, when used shrewdly and with the right advice, leveraging invoices can help generate cash when you need it most and when other avenues to credit are inaccessible.
Here are the 4 ways you can raise finance through your outstanding invoices:
1 – Invoice discounting
Invoice discounting is the most straightforward of the four ways to raise cash through outstanding invoices. The process is typically preferred by larger companies who can afford to be responsible for their own credit controls and debt collections. The process is essentially one of raising cash on the basis of monies owed to your business by another.
2 – Factoring
Factoring is very similar to invoice discounting with the main distinction being that the lender involved actually takes control of your unpaid invoices. Other points to note include that the factoring process involves your customers being made aware that you have leveraged finance on their expected payments. Factoring is usually more expensive than invoice discounting because the company raising finance in this way is obliged to cover the costs of credit controls.
3 – Selective invoice factoring
Selective invoice factoring, otherwise known as ‘spot factoring’, allows a business to choose particular invoices that they would like to sell in return for short-term access to finance. This option involves a good deal of flexibility, with users able to sell certain percentages of a given invoice at a time of their choosing.
4 – Online invoice auctions
The final invoice-based financing option we’ll look at involves auctioning your invoices via websites designed for that purpose. The website itself only facilitates the process, which involves approved investors bidding on invoices you’d like to sell. As with all forms of invoice-based fund raising, the auction process can offer a lifeline to businesses in urgent need of cash when they cannot access through more traditional or mainstream means.
Conrad Ford is Managing Director of Funding Options, an award-winning team of business finance experts who specialise in helping companies find the information and the funding they need.