What is invoice financing?
Invoice financing is a process whereby a factoring company will pay you a percentage of an invoice that is owed to you by a customer. They will then collect the payment from the customer and pay you the remainder of the invoice, keeping a small percentage themselves as a fee. This alleviates issues caused by late payments and ensures constant cash flow. There are two main types of invoice factoring available to businesses; recourse and non-recourse.
Are there different types of factoring?
Recourse factoring is a form of invoice finance where you take on all of the risk. If the customer does not pay their invoice, you will be forced to pay the factoring company and take on the debt yourself. In some cases, you may be able to chase up the debt but it could leave you out of pocket.
Non-recourse factoring offers you a level of protection. When you sell the invoice on to the factoring company, they agree to take on the debt and the risk, so if the customer does not pay, it is down to the invoice factoring company to deal with that. As you would expect, the fees that you pay for non-recourse factoring are higher than recourse factoring, and there are limitations. Not every factoring company offers non-recourse options and even those that do will only purchase the invoices of customers that have a good credit rating.
How to choose between whole ledge and spot factoring?
You will also need to decide between whole ledge and spot factoring. Whole ledge factoring requires you to sell all invoices from a particular client, while spot factoring gives you the freedom to pick and choose. If you have consistent cash flow issues, whole ledge factoring may be the best option. But if you just need a short term cash injection and you do not want to pay out lots of money in fees, spot factoring is a better alternative.
There are a lot of benefits to invoice financing and it can be a very effective way to boost cash flow. However, it is important that you consider some of the drawbacks and explore other short term lending options before making a decision.