The most common types of invoice finance for recruitment agencies are:
Invoice Factoring: The finance provider will fund you invoices but they will provide you with a professional and tailored credit control service. This includes chasing debt from the debtor on your behalf. Invoice Factoring is more popular with small firms who do not have the in-house resource.
Discounting: This is similar to factoring, but credit control is managed by your business as usual. Invoice discounting is 100% confidential which means your customers will be unaware of the finance providers involvement.
The first step in the invoice finance process begins with the business submitting its invoices to the invoice finance provider. These invoices typically represent goods delivered or services rendered to clients or customers. The provider verifies the invoices' authenticity and assesses their financing eligibility.
Once the invoices are verified, the invoice finance provider determines the funding percentage or the amount they are willing to advance against the invoices. This percentage typically ranges from 70% to 90% of the invoice value, depending on factors such as the creditworthiness of the customers and the overall risk associated with the invoices.
Before funds are disbursed, the business and the invoice finance provider enter into a formal agreement. This agreement outlines the terms and conditions of the invoice finance arrangement, including the fees, repayment terms, and any recourse options in case of non-payment by the customers. It is crucial for businesses to carefully review and understand the agreement to ensure transparency and alignment with their financing goals.
Once the agreement is in place, the invoice finance provider disburses the initial advance to the business. The funds are typically transferred to the business's bank account within a specified time frame, usually within 24 to 48 hours. This immediate infusion of cash gives businesses the working capital they need to meet their financial obligations and pursue growth opportunities.
There are two types of invoice finance, namely factoring and discounting. Depending on the type of invoice finance chosen, the responsibility for credit control and collections may lie with either the business or the invoice finance provider.
In invoice factoring, the provider is responsible for credit control and collections. They take charge of managing the sales ledger, issuing payment reminders, and collecting payments from customers. This relieves the business from the administrative burden of chasing payments, allowing them to focus on core operations.
With invoice discounting, the business retains control over credit control and collections. They continue to manage customer relationships and collect payments directly from the customers. The invoice finance provider is not involved in the collection process but may periodically review your customers' creditworthiness.
As the payment due date approaches, customers are expected to make payments directly to the invoice finance provider. The provider reconciles the amounts received and updates the business on the status of the invoices. Once the customers' payments are received and processed, the provider deducts their fees and any outstanding amounts. The remaining balance, known as the reserve, is then remitted to the business.
Invoice finance providers charge fees for their services, which may vary based on factors such as the volume of invoices, the creditworthiness of the customers, and the overall risk associated with the financing arrangement. It is essential for businesses to carefully review the fee structure and understand the potential costs associated with invoice finance before entering into an agreement. Common fees include:
Discount Fee/Interest: This fee is charged on the initial advance amount and is calculated based on the time it takes for the customer to make payment. It is typically expressed as a percentage over the base rate.
Service Fee: Invoice finance providers may charge a service fee to cover the administrative costs of managing the financing arrangement. This fee is usually a percentage of the invoice value.
Additional Charges: Some providers may levy additional charges, such as setup fees, account maintenance fees, disbursements or termination fees.
As the business generates new invoices, the invoice finance cycle repeats itself. The provider assesses the eligibility of the new invoices, disburses funds based on the agreed funding percentage, and manages credit control and collections. This ongoing funding arrangement provides businesses with a consistent and reliable source of working capital to support their operations and growth. In some cases, if a customer fails to make payment within a specified period, the invoice finance provider may provide recourse options. Recourse allows the provider to recover the advanced funds from the business. This serves as a risk mitigation measure for the provider and highlights the importance of creditworthiness assessments and effective credit control.
Effective cash flow management provides the necessary funds to market and grow your construction business in the UK. Construction finance is a specialized product designed to transform your business by freeing up your time, energy, and, most importantly, the cash tied up in unpaid invoices or locked in contracts.
© 2024. Guavas Finance Ltd
© 2024. Guavas Finance Ltd
