Receivables finance explained
Receivables finance, in its simplest term, is basically a short term loan from a lender to a borrower secured against assets.
The lender would either be a bank, finance company (or individual).
The borrower would be a company (who produces goods) or business person (who provides services).
The security would usually be an asset, such as a physical goods (or services) or the invoices they raise.
Receivables finance in detail
Receivables finance comes in different forms such as Factoring or Invoice discounting. In terms of cash flow, it will be similar to other loans. The key differences between factoring and invoice discounting will be in who assumes responsibility for executing the administration of collecting payments (the borrower or the lender).
With Factoring, the provider (lender) takes the role of managing the sales ledger, credit control and chasing customers for settlement of their invoices, whereas with Invoice Discounting, the business (borrower) retains control of its own sales ledger and chases payment in the usual way.
Another difference between Factoring and Invoice Discounting is in the area of confidentiality. Given the above, with invoice discounting, the customers may NOT be aware that that the borrower has assigned its obligations. This is not always the case as factoring companies prefer to work in partnership with businesses, receiving payment directly and then rebating the client, which reduces payment risk to the lender (and can be more efficient for all parties involved).
Who uses Factoring and Invoice Discounting?
Factoring and Invoice Discounting are particularly suited to businesses in areas such as:
- Manufacturing
- Wholesalers
- Recruitment
- VAT
But in any business that provides services or goods to other businesses and gives customers credit terms of 20-180 days, Factoring and Invoice Discounting can solve the problems associated with slow payment.
Factoring and Invoice discounting could also be useful for start up finance, growing a business (putting cash to work quickly) and businesses that struggle to bridge the gap between invoicing customers and getting paid.
Get advice — for free
If you are considering Factoring and Invoice Discounting, why not speak to LEM solutions instead of paying an additional brokerage fee which can often unnecessarily raise costs?