We’re on a mission to open up the benefits of invoice finance to as many businesses as possible.
To cut through some of the complexity, we’ve developed a simple step-by-step process for each of the invoice finance products we cover:
Let’s take CHOCCS (Client Handles Own Credit Control Services) as an example.
CHOCCS sits somewhere between invoice factoring and invoice discounting. As with discounting, you retain control over your invoices. As with factoring, the arrangement is disclosed to your clients/customers.
Here’s how it works in practice:
1. You send out an invoice to your customer as normal.
2. You also send a copy of the invoice to your funder.
3. Within 24 hours, you’ll receive up to 90% of the invoice value from your funder.
4. You are responsible for chasing the invoice. Your funder is not involved in contacting your customer.
5. Your customer pays your funder directly.
6. The remaining invoice amount (e.g., 10%) is advanced to you, minus the agreed fees.
Note that the steps above may differ depending on the invoice finance product selected.
Now let's look at the six steps that make up an invoice factoring arrangement. We'll also dive a bit deeper into what’s involved at each step in the process.
Step 1: Invoice your customer as normal
Nothing changes in the way you raise and send out invoices to your customers. Of course, you must have unpaid invoices in your accounts receivable to access invoice factoring. Depending on how much working capital you want/need (and how much the factoring company is willing to provide), you can decide how many accounts you want to sell.
Step 2: Issue a copy of the invoice to your factoring provider
At the same time as you invoice your customer, you would typically upload a copy of the invoice to the funder’s online portal. Before you receive the advance cash, the accounts receivable need to be verified. This includes checking the credit rating and payment history of the invoiced customer. After passing verification, your customer must be notified that their remittance payments should be sent to the funder (not to you)
Step 3: You will be advanced up to 90% of the total invoice value immediately
Remember: you won’t receive the full amount of your invoice’s value up front. For invoice factoring, the typical range of this cash advance is 80% to 90%. This first instalment will be forwarded to you by the factoring provider. You are then free to use this working capital in whatever way you wish. This might take the form of paying your suppliers, running payroll for your staff, buying new inventory or equipment, paying business expenses, or advertising/marketing activities. No evidence or proof of expenditure is required, and there are no monthly repayments as you would expect with a loan from the bank.
Step 4: The lender does the credit control on your behalf
No more time and effort spent chasing unpaid invoices – the factoring provider does the hard yards for you. In some cases, this even extends to taking legal action to settle any unpaid debts. No hits to your credit score.
Step 5: Your customer pays the factoring provider back directly
Your customer pays the factoring provider directly, and the factoring provider is in charge of credit control. (This is where invoice factoring differs from invoice discounting, where the client retains control.)
Step 6: You receive the remaining 10% minus any pre-agreed fee
Your factoring provider keeps the remainder of the original invoice (i.e., 10% in the case of a 90% advance) until your customer has paid in full. Once paid, the provider will deduct the pre-arranged fees from this remaining amount (the second instalment of the original invoice) before passing the money directly to you.
Setting up invoice factoring: what do I need?
As part of the application process, your new factoring provider will want to build up a picture of your business and how it operates. This will include top-line financial figures (actual and forecasted), key customer accounts (including the length of the business relationship and their trustworthiness when it comes to credit), payment terms and any common invoice-related disputes.
The funding provider will also need to register their professional interest in your company’s debtors with Companies House. Known as a debenture, this is what allows the provider to become the sole funder of your invoices.
In terms of the factoring agreement itself, this will typically include the following:
Once the required documentation has been signed and the debenture has been registered, your customer accounts will be set up on the provider’s system and their invoices will be verified. It’s at this point that the provider will liaise directly with your customers about the factoring arrangement and address any issues that may arise.
Let’s say you’re a wholesale business supplying school uniforms. You’ve just signed a deal with a major supermarket, who have placed a significant purchase order worth £100,000. The supermarket wants the clothing items immediately but can only pay for them in 3 months’ time. This is your first substantial order as a growing business, so you accept the payment terms.
You produce the items as required, raising an invoice for £100,000 that’s due in 90 days. Of course, if any other large orders arrive during this period, your cash flow is going to be under some serious pressure, with suppliers and staff to pay, for example.
You come to us and we broker a deal with a suitable invoice factoring provider. Your new provider advances you 90% of the invoice value on the same day you agree to sell the supermarket client’s account receivable. You receive £90,000 directly from the funder.
As the 90-day deadline approaches, the supermarket pays the £100,000 in full. Under the factoring agreement, this money passes to the funding provider. Once the payment is received, the provider releases the remaining £10,000, minus their agreed fee of 1% (£10,000 - £1,000 = £9,000 released). In total, you receive £99,000 of the original purchase order, £90,000 of which hit your bank account when you needed it most.
Result: You get the working capital you need to deliver your first significant trade order and to compete for future large-scale contracts. And your new client gets their order on time. Win-win.
Speak to us today about finding the right invoice finance product for your business. Our advice is 100% impartial and 100% free.
Invoice Finance is a perfect way to help your business manage cashflow and to remove the headache of late payers. There are a number of ways that an invoice finance facility can be structured and it can be tailored to your preferences.
Why not try our “help me choose tool” to allow us to support you in making the right decision for your business in 4 easy steps?
