Invoice finance includes both invoice discounting and factoring; these are methods of raising funds against the value of a company’s unpaid invoices, also known as ‘receivables’. In many ways, they offer simpler routes to raising cash and do not require security or guarantees, as do many overdraft or bank loan arrangements. The principal difference between the two is that invoice discounting services are entirely confidential, so that the company continues to control its own sales ledger and to collect payments directly from its customers.
As with factoring, the lender makes available a percentage of the total value of an invoice for the initial payment; this is normally between 80 and 90 percent. Sometimes, protection from bad debt is included in the service. Unlike factoring, however, copy invoices are not usually issued to the lender. Instead, invoice discounting services are provided on the basis of the company supplying the lender with listings from its sales daybook. This makes senses, as the company retains the sales ledger and remains responsible for chasing payments, issuing statements, etc.
Any funds collected by the company against the invoices are paid into a specially created bank account and the lender is notified. The lender then pays the balance of the invoice totals, minus any charges for the service that have been agreed. Service charges are negotiated with client companies, based on their annual turnover and interest on the funds that have been advanced.
Unlike factoring, where the lender takes over responsibility for credit control, customers generally remain unaware of the arrangement.