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This is the generic term often used in respect of both factoring and invoice discounting. Invoice finance is a flexible means of raising cash for working capital or for other business uses by utilising a company's outstanding, unpaid customer
invoices as security for the lender (or factor).
At some point most companies, especially growing businesses face cash flow problems. In fact, research has shown that many growing businesses that fail do so because they owe more in the short term than they can pay short term. This seems paradoxical. How could a growing
business that is actually profitable struggle or even go under? On closer examination it is not so ironic or surprising - a large contract, for example, comes in that does not pay on time or a new market opens up and management face increased production and related costs.
Both can fundamentally effect the cash position of any business. Both effect the company's operating cycle which will need funding. There are many other scenarios as well.
Put simply, invoice finance can accelerate cash flow by speeding up the payment of up to 90 percent of the value of outstanding customer invoices. And unlike other methods of financing, factoring, in addition to providing a source of money also provides a company with
credit/collection services. These services should eliminate the majority of collection problems such as credit investigations, slow payments, and most bad debts. Furthermore, factoring can provide savings in both salaries and management time. Invoice discounting, alternatively,
is a confidential facility (although sometimes disclosed) that provides business finance but without the additional services offered by factoring. Both eliminate the danger of sales outstripping a company's financial ability to service customer orders (as in the examples above).
This allows the business to fund orders to new profitable customers, where as otherwise existing slow paying customers may otherwise be holding back the business by tying up valuable working capital resources. With invoice finance as a company's sales and outstanding debtors
increase, its availability of cash increases.
Invoice Finance has seen a significant growth in its use in recent years and as a result the number of companies providing invoice finance has increased substantially. Unlike traditional sources of business finance, namely the high street banks, there are now around eighty
different Invoice Finance providers operating in the UK. These are a mixture of UK clearing bank owned companies, merchant bank factors, overseas bank owned factors, building society owned factors and a number of privately funded companies.
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