Invoice Finance

How Invoice Factoring Differ from Traditional Financing

The presence of invoice factoring is a blessing in itself given how both complex and taxing raising financial resources can be. This debtor type, receivables funding method sure has its unique set of advantages such as zero debt, affordability and a 24-hour quick application to cash release timeline but to a traditionalist, the idea can be a bit too good to be true.

If you’re one allow us to better illustrate how invoice factoring works by comparing it to traditional financing aka a bank loan.

Traditional Financing • Definition: A type of financing where an amount of money is lent on the condition that it will be paid back within a predetermined period, often long term which can range from five to twenty years, with additional interest. • Costs: Traditional financing is governed by interest fees, often compounding in nature, which must be paid on top of the principal.   • Requirements: Asset-based collateral, such as real estate properties, may be required as guarantee to the transaction. • Accounting: This is usually recorded as an increase in liabilities, an increase in cash and a debit to an interest expense account for every period. • Users: Bank loans and similar options are very strict in nature and are often available to established entities or those with enough assets on their books.

Perks Enjoyed with Single Invoice Factoring

Single invoice factoring is considered a blessing by many, if not all, entrepreneurs all over the world. It has in its own unique way changed the way by which financing revolves thereby providing a new option with better results. But for those who find it foreign and new to their ears, allow us to specify the many perks enjoyed from using single invoice factoring. Here, take a look.

It hastens receivable turnover. Because it releases locked up cash through and advance, it therefore shortens the time by which you wait for your customers to pay up their dues at the designated maturity date. It hastens up collections therefore you wouldn’t have to wait for days, weeks or months before you get hold of the cash to use it. The injection of cash improves cash flows and working capital. 

Single invoice factoring gets you the cash you need fast, easy, simple and when you need it. It is fairly quick and easy and will require less hassle when compared to applying for a bank loan or similar type of financing. In fact, the funds can be available in as early as twenty four hours making it the best option for emergency and short term liquidity needs.

It isn’t a loan. Apart from the fact that there are no lengthy and meticulous credit applications, there’s definitely no need for property collateral or compounded interests because the method is not a liability transaction. It produces no debt. It isn’t about your credit score or your assets. Factors aren’t heavily concerned about how much debt you have or how massive your asset portfolio is. What they are concerned about is whether your customers to whom you charged your invoices are financially capable of paying their dues. This is why the method is considered non-discriminatory. Meaning, it can be used even recovering entities, startups and small to medium scale enterprises and not just the established businesses.

Which Spot Factoring Companies to Target

Now that you’ve settled on a financing option, it’s time to look for spot factoring companies that can deliver sterling quality. But how do you know which ones are the better than the rest or which is the best? 

1. Choose those that uphold timeliness. Spot factoring’s benefits banks on its ability to raise cash in a short amount of time with some providers able to release funds in as fast as twenty four hours. If they cannot deliver on time then the purpose is defeated as the goal here is to advance the value of an invoice prior to its maturity. 2. Opt for one with expertise on your industry. Not all providers cater to the same business type. While some offer a generalized service, there are those that are more specific. It would be best to opt for those who specialize in one’s industry as this would mean more experience and expertise. This way, the quality and type of service received is more tailor fit to one’s needs and circumstance. 3. Quality customer service is a must. It’s hard to work with spot factoring companies with staff and employees that are difficult to talk to. Lack of good customer relations can mean poor processes and if they cannot deliver here then imagine what else they might not be able to provide. Apart from being accommodating, their communication channels and effectiveness must also be above par. 4. Insist on transparency and process simplicity. Spot factoring isn’t a complex or complicated financing option. It is pretty straightforward. It would therefore be questionable if one deals with a provider that has vague and very confusing terms, conditions, requirements and procedures. 5. Of course, find those with reasonable fees. Why not cheap? As the adage goes, when its’ too good to be true then it probably is. The same happens when a certain service is offered for way too cheap. It’s likely below par or a scam. As for expensive ones, a high price point is never a guarantee of quality. Therefore, look for reasonability. Again, research and check current and past customer feedback and reviews.

The Truth About Spot Factoring Exposed

We all love a good expose, don’t we? But we’re not tackling celebrities or politicians here. That’s not how we roll. We prefer to take things with an informational and directional approach. Who or what are we exposing then? Spot factoring, that is, and the truths about it no one told us about or at least affirmed us. Yet. Until today.

Also known as selective or single factoring, this type of financing focuses on deriving cash by advancing the value of a particular sales invoice in exchange for the rights to its collection. The provider then releases cash equivalent to a majority percentage of the total invoice value to the company. Moreover, it assumes the collecting function relieving the administrative work on the business’ part. The remainder of the invoice value shall only be released upon its maturity and right after full payment has been received from the owing customer.

Now, here are the truths that we were telling you about earlier. Mind you, even an effective and prominently used mode of financing can come confusing or foreign to many ears.

·      Spot factoring does not take away invoice value. Because of the advance and the shifting of collection rights, many businesses would assume that the method will also be costly in a sense that the provider takes home a huge chunk of the receivable. They don’t. If you carefully read the second paragraph again, you’d realize why. What they do take, however, is a professional fee which both parties agrees and signs to at the beginning of the transaction.

·      It keeps customers. It doesn’t scare them away. The financing providers are not like credit and collection companies. They certainly are not. In fact, businesses may opt for a disclosed agreement just to avoid any misunderstanding when collection comes in. Besides, customers won’t be paying less or more nor earlier or later. They’re essentially not affected.

·      It is a onetime deal. The words spot, selective and single are obvious takeaways. The method only involves and uses a specific invoice. In fact, the company gets all the liberty when it comes to choosing it and deciding when to do advance its value. As with the fees, it’s also a onetime thing. There are no long term contracts involved too. Cool beans, huh?

Why Single Invoice Discounting Saves the Day

Financing is hard and even that is an understatement. It is complex, comes with a lot of strings attached and takes a lot of factors in tow. But we can all agree that it’s a necessity. You can’t forego the need for it because cash is a business’ lifeblood. Without it, operations can’t run even if you have the best people on your team. So what’s there to do? What can save the day? For many companies, that would be Single Invoice Discounting.

What is it then? Single Invoice Discounting is one of two types of receivables finance that allows companies to choose a particular receivable in the form of a sales invoice. It is then traded to a provider in exchange for an advance of its value (cash) that is to be received immediately. That’s prior to its actual maturity date. The invoice is then held as a form of security or collateral by the provider. The company then goes on to use the resource and collects from the owing customer when it’s due. Upon doing so, it then goes off to pay the provider for the amount advances plus a fee.

From the above explanation, we can already deduce why Single Invoice Discounting does save the day but for the sake of discussion, allow us to point them out.

·      It’s not a loan. – Even if the invoice is used as a form of security or collateral, the transaction does not equate to a debt and leaves the liabilities section of your books untouched. It’s not a loan and therefore does not have the strings attached to one. That means it comes with zero interests and no penalties.

·      It’s a onetime transaction. – Otherwise known as selective or spot invoice discounting, it only tackles a single receivable. Meaning, there are no long term contracts or relationships to be had between the parties. It’s free of any long term obligations and payments too.

Single Invoice Finance has fast become one of the most sought after methods of deriving immediate and fuss free cash and resources in the business world. Unfortunately despite of its widespread use, there are still quite a number of false impressions and misconceptions about it that hinder many users and interested companies to truly benefit from it.

Today we’ll iron out the facts to give everyone a clearer understanding about Single Invoice Finance (SIF).

MISCONCEPTION – “It removes corporate control and ownership”

THE TRUTH – No amount of ownership or control shall be transferred to the provider. Assets still remain with the company and the financing medium does not involve any form of property collateral that can endanger rights toward them. It is after all not a debt.

MISCONCEPTION – “It significantly diminishes the value of one’s receivables.”

THE TRUTH – The amount received in advance is equal to a major percentage of the invoice’s value which can be anywhere from 80-95%. The remaining balance is not absorbed by the provider but instead will only be held for security reasons until the owing customer pays and collection is completed. It is at such point where the remainder is released to the company less of the fess agreed upon.

MISCONCEPTION – “It chases customers away.”

THE TRUTH – Factoring, one of the two types of SIF, may shift the collection function from company to provider but this does not in any way intimidate customers whose invoices were used in the transaction. The same procedures exist to the point that clients cannot tell of the change.

MISCONCEPTION – “It’s for the financially incapable.”

THE TRUTH – The SIF method is for everyone regardless of size, financial condition and solvency. This is for the reason that the creditworthiness in question is not of the business’ but of the customer’s to which the invoice is associated to. The customer is the debtor in this scenario as they have taken out a credit purchase; therefore providers are more concerned of their creditworthiness. Troubled companies can make use of Single Invoice Finance but not all those that use SIF are troubled entities.

MISCONCEPTION – “It is expensive”

THE TRUTH

Spot factoring or single invoice finance is a method that allows businesses to advance the value held and trapped in their receivables, releasing them even before payment has been sought and paid by owing customers. The factoring agent in turn receives a certain percentage or fee from it.

In such an arrangement, the company has all the liberty to decide on the invoice to factor out, when to do it and how often. What makes it a really promising form of financing lies in the fact that it is immediate with certain providers able to release cash in as fast as twenty four hours and therefore unlike other more common funding options that can take weeks or months.

Moreover, spot factoring is not a form of debt and comes free of interests. It does not reflect as a liability in the accounting records but seen instead as a decrease in trade receivables coupled by an increase in cash. It therefore strengthens working capital, improves cash flows and hastens receivable collection all without the burden of debt.

Many companies seeking to go into the international trade and take advantage of the market have sought after the help of export finance. If you’re wondering why then you have come to the right place as we will be tackling the benefits it provides and why you might need it.

First of all, there are many types of export finance. We have the documentary credit with deferred payment, the documentary credit with bank-to-bank financing, the bill of exchange or the buyer credit to name a few. All of these aid in making foreign sales more profitable and bearable in terms of paperwork and payment collection from customers.

Today we are not going to discuss these types one by one but we shall talk about the benefits of export finance in general or as a whole.

It helps avoid certain risks. Export finance helps exporters go into the foreign market without having to worry about seasonal, credit, currency and interest-rate risks during the settlement period. These three are known to be one of the top reasons that discourage companies to dip their toes in foreign countries.

It does not require the use of administrative resources in debt collection. The provider of your export finance shall be the frontrunner and chiefly responsible for payment collections overseas. Companies no longer have to put in their own staff and employees to do such work.

It gives you a competitive edge. By expanding your market, you also create more income sources. Domestic sales are only a small part of the equation compared to if you have the world in front of you. Remember that what may be poor in demand right now in a particular country can be the opposite for another and vice versa. For example, fall and winter seasons will dampen ice cream and frozen yogurt sales. If you have an international market for it, and by this we mean a market in countries of the opposite season or of a perpetual tropical climate, you won’t be hit quite as hard. Your risks are diversified thus giving you a better edge compared to others.

Invoice factoring has become one of the most popularly used types of finance used by entrepreneurs today. It is a type of receivables financing that allows businesses to advance the value of their customer invoices even before payment collection commences. In such an arrangement, the financial provider not only provides for the value of the invoices but specifically buys the right to collect against them thus they pursue the debtor-customer for payment, issues statements and performs all the usual credit control actions. This lifts off a whole lot of work which is beneficial for businesses. Now there are essentially six types of factoring according to the R2ei: confidential, disclosed, non-recourse, with recourse, domestic and export.

1. Confidential Factoring In this arrangement, the customers are completely unaware that the company they owe to have taken the financing method. Even if the factor collects from them and sends them statements, they will not be let in on the hood. This is often chosen by companies to prevent misunderstanding and mixed signals as some people connote factoring to financial distress which is not the case. 2. Disclosed Factoring In contrast to the previous type, disclosed factoring makes the financing known to customers. This is oftentimes done when a particular invoice is risky or has a low level of collectability. 3. Non-Recourse In this type, failure of the customer to actually pay will not reverberate back to the company. The financial provider aka factor will bear the risks and burden to such failure in collection. 4. With Recourse In contrast to item number three, this alternative will have the provider come back to the company for payment should the customer fail to do so. Because there is lesser risk involved, with recourse arrangement is much cheaper than non-recourse factoring. 5. Domestic Factoring As its name suggests, the company sells the right to collect against its invoices to a domestic or local financial institution. In other words, the provider can be found within the country’s territorial boundaries. 6. Export Factoring In export factoring, the company trades with a factor from overseas or in another country in order to take advantage of exchange rates and other trade opportunities.

UK Single Invoice Finance has become one of the most widespread and popularly used methods of raising the needed capital for businesses who do not want to spend much on a financing option.

This type of financing to begin with allows companies to raise funds with the use of their receivables or customer invoices. We all know that sales can happen both in cash and in credit. In cases of the latter, we have a receivable from the customer which can be paid in lump sum or in instalments in the days or months to come. Sometimes, entrepreneurs would need cash and to do that they can advance the value locked in the said invoices from an institution that provides such services.

You can get around eighty to ninety five percent of the value of the customer invoice in advance with the remaining balance less the fees to be forwarded once the financing institution has fully collected from the owing customers. There are a number of benefits to this method and they are listed down below.

·         First off, single invoice finance only subjects one specific receivable to the service. When you do this, how often and what specific invoice will totally depend on the company. The service provider would have no say on this. In short, it has great liberty and freedom when it comes to the use of the service.

·         It is a form of quick cash injection into the system. This is helpful for entities who are having trouble with their cash flows and who would need a helpful increase in their inflows. It will also make your cash flow statement more attractive for investors.

·         It appears as a reduction in trade receivables and an increase in cash. This is a good thing for your financial statements particularly your balance sheet. Even if assets are high this does not mean that the business has enough financial resources. A huge amount of receivables only mean that much of your cash are locked up. Invoice financing frees them for use hence increasing your physical money.