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Invoice Finance, Invoice Factoring & Invoice Trading: What’s the Difference?

Within the invoice finance space there are so many different options. Understanding which type is right for you and what the differences are between them isn’t always easy.

Under the umbrella of invoice finance there are several options, ranging from discounting to factoring to trading. Here we focus on invoice factoring and invoice trading – two options which commonly cause confusion but have a huge impact on the cash flow of your business.

Invoice Factoring

Invoice factoring involves a third party provider managing your entire sales ledger. You will be locked into a facility that restricts the available funding as your business grows. Alternatively, if you want to reduce your level of funding and costs, you will also be locked into a fixed level of funding that you are paying for but may not actually need. Because of concentration limits, you will only be advanced between 50% and 80% of the invoice.

The provider will also interfere in your customer relationship with responsibility for collecting and chasing payments directly from your customer. Some businesses like the fact that the responsibility lies with the factoring company, however, this involves your customers being contacted directly and how that relationship is managed is out of your hands. If there is any issue with debt collection it could jeopardise your relationship with your customer.

Some providers tie you in for up to 24 months, requiring 6 months’ notice and exit fees if you wish to leave early. Factoring is a long term arrangement and can be very expensive to walk away. Be aware that factoring has historically been known for hidden extra fees, which often aren’t clear as they are rarely on your contract just referenced as information which can be found in policy documents. The hidden fees and lack of flexibility (being forced to sell all your invoices even if you don’t want to) are the main disadvantages of factoring.

Invoice Trading

Invoice trading is a flexible new alternative to traditional factoring or discounting. It is particularly beneficial if the company seeking working capital finance does not want to be tied into a fixed contract. Timelio offers a marketplace where companies sell their invoices to many investors, driving down the cost of finance. The advantage is that sophisticated investors are better able to price risk to buy invoices and diversify their portfolio (meaning no concentration limits!).

Invoice trading allows you to select which invoices you would like to sell and when, rather than having to commit your whole ledger. You decide exactly the amount of cash that you need to bring in for your business. By not locking you in to long term contracts, Timelio puts you in control and you also maintain the relationship with your customer.

By building up a track record of successful invoice trades in the marketplace, you bring down your cost of finance as investors compete to buy your invoices and fund your business.

If you want to be put back in control of your finances, get in touch with us today to see how Timelio can help grow your business.

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