Single invoice factoring is the strategic method of raising financial resources against individual invoices. Since cash is locked up and tied to an asset, in this case a receivable, the procedure frees it up as it enables a business to receive money in advance on a single outstanding invoice before it matures.
Sounds confusing? To elaborate and help you understand further, allow us to put it in contrast to traditional credit, specifically a bank loan.
Classification – It is a type of liability transaction. In other words, a bank loan is a type of debt or borrowing and therefore an obligation towards the financial provider.
Amount – The amount of loan depends on the amount applied for which may be more or less depending on the borrower’s creditworthiness.
Cost or Fees – It involves interests, oftentimes compounded, to be paid on top of the principal in equal installments.
Length of Contract – A type of long term loan, it can span from at least five years to thirty depending on the terms of the contract.
Collateral Requirements – Collateral is oftentimes always involved which can be any of the company’s or its owners’ assets. Properties would be one. It is used as a form of security against the loan in the event of nonpayment.
Application Process – It takes weeks to months for bank loan applications to be processed. They are very meticulous and comes with a number of requirements.
Single Invoice Factoring
Classification – It falls under the category of asset transactions. This means that it is not a debt and is therefore recorded as a decrease in trade receivables coupled by an increase in cash.
Amount – It is equivalent to the value of the invoice being subjected to the method.
Cost or Fees – The fee is a onetime deal which is often deductible against the total value advanced by the business. It is equivalent to an agreed upon percentage from both parties.
Length of Contract – It is a onetime deal and does not involve lengthy contracts.
Collateral Requirements – Because it is not a debt, there are no collaterals involved.
Application Process – Considered to be mighty swift, single invoice factoring can be processed quickly in contrast to other financing methods available in the market. Majority of providers can approve and release cash within at least a day’s time to at most of a few days.
Traditional and single invoice finance has to be the saviors in a world full of cash flow needs and difficult financing options. They’re definite lifesavers if you ask us and here’s why.
In an invoice factoring arrangement there are three main characters or parties: the company selling its receivables, the customer who owes the company and to whom the receivables are attributed to and the financing agent called the factor.
In this scenario, the company sells its right to collect against the receivable by virtue of its sales invoice to the factor in exchange for immediate cash which is to be received before the customer pays their dues. The factor shall bear the burdens of collection and provide an amount that is equivalent to about 80-95% of the invoice’s total value with the remainder being held up until the customer pays in full at the maturity date of the invoice. It is only then when the balance is forwarded to the company less the fees agreed upon.
There are many reasons as to why these two methods are widely used and below are only some of them.
It’s relatively fast. – Ever heard of a loan or similar other financing medium that releases cash in a matter of a day? No of course not. Well not until invoice factoring. Most providers can approve and release the cash in as fast as twenty four hours.
There are lesser requirements to deal with. – It’s less of a hassle because of the far lesser amount of requirements to submit during the application process.
It’s no form of debt. – Wait what? Yes, you’ve read that right. Factoring creates zero debt because it is not one. It also does not bear all the other strings attached to one such as interests and penalty fees.
It injects immediate cash into the system. – With the swift process, it enables the immediate injection of resources into the cash flow thereby strengthening the working capital as it does. This is great in terms of liquidity purposes and frees up any locked in cash within invoices.
Even struggling entities can use it. – Really? Yes really. This is because traditional and single invoice finance providers bank on the customer’s creditworthiness and not on the company’s. After all, it’s the customer who has a debt in this situation as evidenced by the sales invoice.
One of the biggest challenges that manufacturing businesses come to face would have to be their receivables. It does not come as a secret that credit sales comprise of a huge chunk in customer orders and although they still translate to assets, it does not necessarily mean liquid currency. Trade receivables can harm a company’s liquidity when it traps cash into invoices making it unavailable for immediate use, worse when the customer defaults. One of the more successful solutions to such dilemma happens to be in the form of Single Invoice Factoring. But what is it about?
Single Invoice Factoring allows manufacturers to advance the value of their receivables even before their owing customer makes the payment or before the credit sale matures. In such a scenario, the company chooses a particular invoice, oftentimes one with significant value and which covers the amount of a particular need, then factors it out. The provider called a factor shall then provide for an advance of the invoice’s value, which can range between 80-95%, in exchange for the right to collect against it. The remaining 5-20% shall be released only upon the customer’s full payment. The fees shall be deducted from such remainder.
Since many buyers would opt to defer their payments until goods are delivered and/or resold, this helps in ensuring that cash flows still remain on the positive side of the spectrum further strengthening the entity’s liquidity.
Apart from the immediacy of single invoice factoring where it can provide for the release of cash in as fast as a day’s time, it also brings manufacturers a number of other benefits. For one, it is not a debt. Companies need not worry about damaging their credit score or adding more obligations to the pile. Second, it hastens the receivable to cash turnover. It frees the locked up cash thus enabling cash flows to lie on the good side as mentioned earlier. Third, the collection burden and all tasks related to it shall be passed on to and borne by the factor. This relieves the company of such responsibility allowing it to focus on other aspects of operations, particularly those that bring more profit to the business.
And since Single Invoice Factoring banks more on the creditworthiness of the customer to whom the invoice is attached to, even struggling entities or those with a not so sterling credit history can apply for and make use of it without fuss.
UK single invoice finance has become one of the top funding methods used by entrepreneurs today. This allows companies to derive funds out of their trade receivables in even before their owing customers actually send in full or partial payment. The benefits to it are quite diverse. Of course, one has to use them properly in order to receive maximum benefits. The sad thing is that many entrepreneurs fail to grasp its many promising features mainly because of the misconceptions that have surrounded invoice finance. We’re here to help you debunk them so we can have our information all ironed out.
MISCONCEPTION: It’s too costly.
TRUTH: Just like any other type of financing, UK single invoice finance comes with a cost albeit it is much lower than what many people think it is. It is also important to take into consideration that certain features of the invoice financing may increase or decrease the price. Such is the case when getting either a recourse or without recourse transaction. Moreover, different provided offer varying rates some pricier than others even at the same level of quality.
MISCONCEPTION: It drives customers away.
TRUTH: Factoring, which is a type of single invoice financing, creates a transfer of responsibility from company to service provider in terms of payment collection. Entrepreneurs believe that doing so can intimidate their customers because they have sold the right to collect against their invoices. This is where they are wrong. The amount to be paid by your clients will not vary at all. In fact, you should even be happy that the burden of collection will be shifted from your shoulders. Moreover, you have the option to keep the financing method private as when you get a confidential arrangement.
MISCONCEPTION: Invoice finance is only for troubled companies.
TRUTH: It is attractive in the eyes of financially troubled companies but is not restricted to them. Because UK single invoice finance does not function like traditional forms of credit, it is made available to each and every business entity out there regardless of size and financial state. Providers like workingcapitalpartners.co.uk, bank on the creditworthiness of the customers to which the invoices are attributed to and not the creditworthiness of the company itself. It would be completely wrong to say that the service is only for struggling entities because it caters to everyone. As a matter of fact, many large establishments use it to hasten their cash flows, lessen doubtful accounts and improve liquidity.
One of the main concerns that many businesses have is regarding their cash flows. It is important to take note that a good level of sales does not necessarily mean that the amount of cash that goes into the company is doing equally well. Remember that sales can either be in cash or in credit and it is pretty seldom for an entity not to have any customer receivables. This means that your cash inflows may not be looking good even if your sales are doing fine. This is what we call having your cash locked up in invoices making them unavailable for use. So what option do you have? You can improve cash flows with the help of UK single invoice finance.
What is it?
To hasten the turnover of receivable to cash, companies may want to advance the value of a particular invoice. To do this they choose from either two single invoice finance options: factoring or discounting:
In this arrangement, the company will sell the right to collect against a single customer invoice to a finance company referred to as a factor in exchange for an advance of its value. Such advance amounts to eighty five to ninety five percent of the invoice’s actual value. The factor then takes over the task of collection while the company proceeds to use the cash for whichever way it deems fit for corporate operations. Once the factor has been able to collect from the owing customer in full they will then forward any remaining balance on the invoice less any discounts and pre-agreed fees. So basically, the company sells an asset, its customer invoice.
This one on the other hand is a little similar to a loan although there are no debts and no interests involved. What happens here is an advance is still taken out about eighty five to ninety five percent of the invoice value. The invoice is then used somewhat as collateral. The company is still tasked to collect from its owing customer. Once that has been completed, it then goes on to pay the finance company plus any fees that have been arranged mutually.
You can improve your cash flows with the help of UK single invoice finance because they basically hasten up the availability of cash from the receivables. In short receivable turnover is improved and cash is made available even in as fast as twenty four hours to provide for emergency cases.