If you have unpaid invoices by your customers or suppliers, you can get invoice financiers to buy them in lieu of a fee charged to you. Invoice financiers are either third party alternative funders, or belong to banks and/or financial institutions.
There are two different types of invoice finance: factoring and invoice discounting (read the Trade Finance Global invoice discounting guide for free here: https://www.tradefinanceglobal.com/invoice-finance/invoice-discounting/.
Invoice factoring, also known as debt factoring, occurs when the factor (or invoice financier) will collect money owed from the customer on your behalf. It’s a fairly simple, straightforward transaction, whereby, the customer or seller generates an invoice, and the funder buys that invoice.
Normally a funder will hand over around 85% of the invoice up front, before collecting and waiting on the rest of the payment. Once they have recouped payment, they will return the remaining percentage of the invoice, in this case, around 15%, less charges and fees (which are otherwise known as interest and fees for their services).
The cost of fees and the amount of interest depends on the financier you have chosen, and the riskiness of the seller (credibility of that organization), but the process remains the same. A simple example of this transaction is as follows: your business is owed £100,000 and your invoice financier buys that invoice for £85,000, which constitutes 85% of the money you originally were owed. In return, the funder will get their fee and interest that you pay them after they collect the £100,000 from your customer and gives you the remaining £15,000 as well (minus fees).
Invoice financing also comes in another form: invoice discounting (also known as confidential invoice discounting), which allows your invoices to be funded confidentiality so that your customers don’t know you are using an invoice financier. Your business would manage the sales ledger and collect debts from the end customer. What you can do is set a percentage of the value of unpaid invoice with your financiers (as done in factoring at 85%) and they can loan you that amount of money for a fee.
When the invoices get paid by customers, the financiers receive that money and your debt is cleared.
See our infographic on invoice factoring: