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How to raise Business Finance with factoring and invoice discounting.

By: Derek G Cooper

Due to the credit crunch and many banks' unwillingness to lend, businesses are finding it difficult to raise money to finance their activities using traditional sources such as an overdraft, credit card or loan facilities. Given this situation, a large number of companies companies are turning to sources of income such as factoring and invoice discounting.

Factoring and invoice discounting allow a company to improve its cash flow by borrowing against legitimate invoices that have been raised. A company which is taking advantage of this type of facility will normally be able to gain access to 80% of the value of the invoice raised immediately without having to wait for the normal payment period. There are three main ways to do this:

Invoice Factoring
- The process of invoice factoring involves a Factoring Company (often a bank) taking over a company's invoicing and credit control function. When invoices are raised, the factoring company immediately makes credit available to the company. The name of the factoring company is stated on the invoice and the payment of the invoice is made directly to the factoring company. The factoring company will often manage payment collection and credit control.

CHOCCs Factoring
- CHOCCs stands for Client Handles Own Credit Control. This type of factoring is similar to full factoring except that the client maintains responsibility for collecting payment of the invoices. It has the advantages that it will normally be a cheaper service and more control is maintained over the payment relationship with the company's clients.

Invoice Discounting
- Invoice discounting is similar to factoring in the sense that a factoring company will make credit available to the business as soon as an invoice is issued. However, the service is discreet. The factoring company's name does not appear on the invoice and the debtors do not know of their involvement. The company sends out its invoices in the normal way and collects debt in the normal way.

The different factoring facilities would be used depending on the nature of the business. For example, where it is important to ensure that the involvement of a factor is not disclosed, invoice discounting may be a more appropriate method. Where this does not matter or in fact where it is seen as an advantage to involve a third party to help in the collection of debts, then full factoring may be the correct solution.

Of course, for invoice discounting to be made available, the factoring company must have the confidence that the business it is lending to will be able to tightly manage its debt collection processes. For a full invoice factoring solution, up to 80% of the value of an invoice may be made available on the day it is raised. However, as invoice discounting is perceived as a greater risk to the factoring company as they have less control, smaller amounts may be made available using this solution.

Invoice factoring or discounting is an ideal way to improve cash flow based on business already happening, and for it to work the business has to be raising invoices. However it can also be an ideal solution to help improve the cash flow position of a new business such as a Phoenix company. Here invoices will start to be raised almost immediately and so a factoring facility could be used.

Because Invoice factoring or discounting focus on cash flow improvement, they are not usually a good way of raising a lump sum for a specific business project. If this is your requirement and a bank loan is not available, then a more suitable option may be asset refinance.

Invoice financing and discounting are not without cost. Normally both options involve a service charge (which may be between 0.5% and 1% of the sum lent) and a rate of interest. However, where a business is looking to improve cash flow and more tradition methods of achieving this such as bank overdrafts and credit cards are being withdrawn, invoice financing and discounting is often an extremely useful solution.

Derek Cooper is Managing Director of Cooper Matthews Limited.

If your business is need of some additional cash flow, but traditional loan sources have been denied you then look at coopermatthews.com/business-refinancing.html.

Cooper Matthews specialise in Business Refinancing and Business Recovery Services Advice, providing practical insolvency advice for businesses with financial problems to turn your business around. They have significant experience in working with small to medium sized businesses.

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