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Invoice finance or factoring provides a line of credit to businesses, secured against their outstanding accounts receivable, this method of finance allows for a business to utilise valid invoices as security to obtain finance.
Below is some information about invoice finance / Factoring or for further information, please contact North Capital Finance to discuss:
How does it work?
Valid invoices are provided to the financier who provides in most cases 80% of the outstanding funds to the borrower while holding back 20% to cover interest and fees, Once the debtor pays the invoice, the remaining funds are returned to the borrower minus any fees and interest.
With many industries having 30, 60 & 90 day finance terms on their invoice, Factoring has become a valuable method of managing cash flow and financing without the need to provide physical securities such as property or a GSA (General Security Agreement)
What can I borrow up to?
Factoring can at times be a costly way of financing if it is a once off and most financiers that supply this facility charge an upfront fee that can outweigh the benefits of the facility if it is not used for higher levels of funds and on a regular basis. That being said, there is no real limit to what you can borrow. If you are needing something like invoice finance but find the cost too high, look into Short Term Finance
Are there any downsides?
As discussed, factoring can come with high initial fees which unless utilised correctly can outweigh the benefits, due to funds being recouped from debtors, with full service facilities they will generally be notified of the transaction and the funds owed will need to be paid via the financiers accounts.
Can I use any invoice?
The financier may not accept just any invoice, there are checks done that insure that the financier is protected against invoices that may not be paid (bad debtors). However this is all done in the background and you will not be required to provide any of this information, and again larger invoices are recommended due to the initial costs.
If your business works on large projects and is paid via progressive payments this may make it more difficult to obtain invoice finance but no impossible. Progressive payments are a high risk due to the need to finance the work on an incomplete job, so should the project fall over or payments are held back the invoice may not end up being paid.