There are many different ways that companies can raise money from future payments and services to fund their day to day business, but invoice finance is one of the most popular ones. Invoice financing is a general term that is used when a third party, unrelated to your business, agrees to buy your unpaid invoices for a fixed fee. These third parties are generally either part of a bank or other financial institution, a specialist independent funding company, or an individual or group coming together to fund businesses usually through some sort of crowdfunding platform.

There are two main types of invoice finance that are used in the UK – invoice discounting and factoring. Another type of invoice finance – known as invoice trading – has also grown in popularity recently as well. But what is the difference between these different types?

Invoice Discounting

If you go down this route with your recruitment agency, then your chosen financer will lend you money based on your unpaid invoices – usually an agreed percentage of their chosen value.  You will have to pay your financier a pre-agreed fee for this and you will still be responsible for collecting any debts owed to you, but this can be arranged confidentially so that other customers are not aware. The simplest way to think about invoice discounting is like a bank overdraft – it gives you access to a small amount of cash when you need it and in return you pay a facility fee.

The big advantage of invoice discounting is the fact that it is confidential, so your customers will not know that you are borrowing against their invoices. The downside is that you are still responsible for chasing unpaid invoices and collecting the debt from your customers.

Invoice Factoring

This type of invoice finance involves you working with an invoice financier who will take over the management of your sales ledger and the collection of any money owed. Therefore 100% of your trade debt will be managed by the factoring company. Your customers will be aware that you are using invoice factoring as the financier will collect the full amount of the invoice owed directly from the customer but in the meantime the invoice financier will make around 85% of the cost available to you upfront. Once they have collected the money, they will make the rest of it available to you (minus their fee). The amount of this fee will vary on which financier you use and how credit-worthy your customers are.

The advantage of this type of invoice finance is that it frees up your time to concentrate on your business as you are not worrying about your sales ledger management, and all of your potential customers are credit checked so you should see an increase in the number of customers you have who pay on time. The downsides are that it may potentially damage the image of your company as customers may think you are unable to manage debt management yourself, and your customers may also have a desire to deal with your directly and not a financier.

Invoice Trading

The ‘newest’ type of invoice finance, which in many ways is similar to invoice factoring but it involves you selling your invoices to a financier. The main difference to the other types of invoice finance is that invoice trading tends to use online tools as a management system, which allows you to bypass the more traditional financiers, and instead work with individual or groups of investors instead.

The great advantage of this type of invoice finance is that it gives you control over what invoices you sell as you don’t need to handover your entire sales ledger like you do for invoice factoring. However, again you have to be careful that you don’t alienate customers who want to deal with your directly, or who don’t like the fact that they have to speak to the investor and not you.

Invoice Finance for Recruitment Agencies

Many firms within the recruitment industry use invoice finance as their invoices are seen as low risk of not being paid, due to the fact that they are mainly invoices for contract or temporary placements that are backed up by timesheets. This normally means that invoice finance companies will offer a larger percentage of the invoice as a pre-paid amount. Some recruitment agencies also look for invoice finance to fund their permanent placements and ease their cash-flow issues but they will often be offered a lower pre-payment rate due to rebates.

Invoice financing can offer finance recruitment agencies flexibility, as effectively you can pick and choose when you use the service. To find out more about how we can help your business to grow, please give us a call today on our Helpline number, which is 0161 818 9670 or alternatively you can send us an email to enquiries@finance4recruitment.com