Jargon Buster Series: Demystifying Invoice Finance

The finance world is filled with complex terminology and technical concepts— most of which are vital shorthand for finance advisors and other industry participants. From business planning to investment, it is common for business owners to come across unfamiliar and complicated phrases.

These days, where a quick access to funds is of paramount importance to businesses, more and more SME owners are opting for alternative finance products over bank loans. The stiff underwriting and the ‘tick box’ lending process of the conventional providers is causing many finance advisors to look for alternative funding products to ensure they can execute those all-important business goals.

But getting finance is not always easy, especially when the industry is full of new phrases most people have never even heard of. Unfamiliar terms like “invoice finance” and “factoring” can feel scary, but do not throw in the towel just yet. Like everything in life, once the unknown becomes known you are in a strong position and armed with the facts can make a decision about the right option for your business.

Whilst at first you may feel as if you are in way over your head, you will soon grasp exactly what is meant by each phrase, meaning you’re better equipped if you do decide to access that type of finance.

So, if you are a business owner looking for well-needed funds for your business or just trying to get a better understanding of your finance department, here are the basics you need to know about that mind-boggling finance jargon you keep coming across.

We have highlighted some of the most widely used terms encountered by business owners while seeking finance:

1)    Invoice Finance: As the name suggests, invoice finance is a finance option provided against the value of unpaid invoices of a business. Simply put, it is money provided to businesses who need to get access to funds that are tied up in the amounts due from their customers.

Traditionally regarded as ‘the finance of last resort’, in recent years invoice finance has shaken the negative image and once again become a practical and sought after working capital solution. It is the most sought after alternate finance product because it allows businesses to access funds instantly after raising an invoice, instead of waiting for their customers to pay out. It is an asset based lending option as the invoice raised by a business is deemed an asset.

Waiting for invoices to be paid can hamper the cash flow of any business. By using  an invoice finance facility, business owners can access funds up to 90% of the outstanding invoice book. In some cases, invoice financing providers function just like collection agencies, as they take on collection of the debts created by non-paying customers

2)    Factoring: Factoring is a type of invoice finance where the finance provider takes responsibility for managing the complete sales ledger,  along with credit control. The invoice finance provider handles the collection of invoice payments and the collections are paid right away on a pre-disclosed basis. For a business owner, this is an added benefit as it means they no longer have to spend time and effort handling debts and processing invoices but some businesses prefer to keep control of their relatonships with clients as they worried they may be affected by third party involvement.

3)    Invoice Discounting: This is another type of invoice finance management where the business handles sales ledger management, credit control and the collection of invoice all by themselves. In this type of arrangement, payments from invoices are deposited directly into a bank account owned by the invoice finance provider, but held confidentially in the name of the business seeking invoice finance (trust account). This type of invoice setting guarantees confidentiality and allows businesses to retain control of their client relationships and sales ledger, with no involvement in collections by the finance provider.

4)    Credit Control: Credit control is the process used by businesses for receiving payments from customers. It is important that only those customers who are responsible payers are awarded credit. Credit control is an essential part of the process that ensures that once sales are made, the business receives the payments from customers.

Our products and services come with guaranteed expertise, honesty and certainty. If you are experiencing cash flow challenges or want to realise your business growth plans, take a look at our range of funding solutions and apply now to get started!