Financing growth: Debt factoring and invoice discounting

Debt factoring

Debt factoring is a method of releasing working capital from invoices in advance of them being paid.

A third party - such as a major bank, financial institution or independent organisation - agrees to pay a business cash advances on the strength of their unpaid invoices. These invoices are subsequently paid directly to the factor, who levies the agreed fees and applicable interest charges. In short, you get cash faster than you otherwise would have, but you give away a percentage of each invoice.

Factoring can be a complex agreement to initiate, and is usually only available to businesses trading with other companies on credit terms. Factors will require access to your business plan and financial records, in order to determine your suitability for a factoring facility, and you will need to discuss several key details with the factor when ironing out the terms of the agreement.

In addition to providing a boost to working capital, factoring may represent a cost-effective way to outsource your invoicing function, protect you from bad debts, and help you streamline your cash flow and financial planning. Useful benefits when pursuing a growth strategy - but as with most borrowing - the advantages come at a cost.

For more information on Debt factoring read our guide to Debt factoring and invoice discounting

Invoice discounting

Invoice discounting is another method of drawing money against invoices, but does not require a business to hand over control of its sales ledger.

A third party invoice discounter agrees to advance a percentage of the total outstanding sales ledger. In return, an agreed monthly fee is paid to the invoice discounter, alongside any additional interest charges on the net amount advanced. Month by month - assuming the total of outstanding invoices changes - so will the total amounts paid to and from invoice discounter.

Invoice discounting is similar to factoring in respect that it is often a long-term agreement, offered to businesses that deal on credit terms. It offers similar benefits too, such as the release of working capital quickly into the business, and a more robust cash flow system which may help manage financial investments or facilitate rapid growth. Unlike factoring, you retain control of your sales ledger, avoiding the need make your clients pay invoiced amounts to third parties.

For more information on Invoice discounting read our guide to Debt factoring and invoice discounting

Important note: It is advisable to seek professional guidance on the legal and financial implications of any type of financial arrangement.