What is invoice factoring and how is it used?

We are often asked “what is invoice factoring and how is it used”. Invoice factoring is a form of invoice finance. Invoice finance is an umbrella terms which covers different types of finance facilities including invoice factoring as well as invoice discounting, maturity factoring and recourse factoring.

Invoice factoring involves the assignment or selling of both present and future invoice debts of a business to the financier e.g. an independent company or bank, who then become the legal owners of those invoices.

The benefit to the company entering into this agreement is that it receives an agreed prepayment percentage against the value of those invoices e.g. 80% or 90% of the invoice value is directly sent to it upon notification of that invoice to the bank. That can have huge benefits for a business in terms of cashflow and the ability to use that cashflow to grow the business. It is well known that big business in particular is very slow at paying smaller companies their invoices and this way, the company gets the benefit of the majority of the invoice being paid immediately by the bank. The balance of that invoice less any charges is also remitted to the company.

In terms of invoice factoring, the bank or finance company providing the invoice finance also carries out the administrative sales ledger tasks including importantly the credit control function. Therefore, for businesses with no credit control function this is a huge benefit as it can rely upon the team of experts at the finance company to chase any outstanding debts and deal with those debts if they are not paid. This cuts down on overheads of the business itself. Obviously, this facility is slightly more expensive than a confidential facility as a result of using the bank’s in-house experts, it can be of huge benefit to certain businesses. Whilst invoice factoring is much less used now than it was, it is still an important form of finance for certain businesses.

Contact the invoice finance legal team

Francis Wilks & Jones is one of the leading legal firms in the country specialising invoice finance matters – from the commercial finance drafting side, advising on deals, dealing with litigation and also insolvency related matters. Our team has combined experience of many years acting in invoice financing related matters. Whatever your invoice finance related question please contact us now and we can help you.