Invoice financing: an alternative to factoring

As a manager, you know all too well the importance of managing your cash flow in order to ensure that your business functions effectively. Having to wait for your clients to pay their invoices by the due date can be very restricting. Did you know that it is possible to sell your outstanding invoices to get the money you are owed quicker? Inspired by factoring, invoice financing is an innovative and appropriate solution for SMEs, offering several additional advantages. Here is an overview to help understand how it works.

Every business owner knows it: Even with a well-filled order book, unpaid invoices can undermine a company’s financial health. So much so that insufficient liquidity remains one of the leading causes of bankruptcy today. To avoid this problem and support the growth of their business activities, entrepreneurs naturally turn to their bankers to discuss the various solutions available to them: overdraft facility, discount credit, short-term credit, etc.

One of the available alternatives is factoring, which involves selling client invoices awaiting payment to a specialist financial company (the factor). The factor then advances a significant percentage (up to 80-90%) of the amount of outstanding invoices and collects the amounts due from clients. In practice, traditional bank factoring is subject to a number of restrictive conditions that often render it inaccessible to many (very) small and medium businesses. But did you know that there is a more modern and less restrictive alternative to traditional bank factoring — invoice financing? This solution is intended both for the self-employed as well as companies of all sizes and in all sectors.

What is invoice financing?

Like factoring, invoice financing allows companies to maintain their cash flow without having to wait for invoices to fall due. This means the funds can be used quickly. As well as outsourcing the management of debt recovery to free themselves from certain administrative tasks (follow-up, reminders and collection of invoices, management of outstanding payments, etc.), companies can protect themselves against the risk of client insolvency by taking out credit insurance.

Invoice financing essentially comprises three independent and complementary services.

• • Receiving payment for an invoice without having to wait for its due date. Among the solutions available, some undertake to pre-finance outstanding invoices within 72 or even 48 hours.
  • Outsourcing invoice and debtor management. The invoice is removed from the balance sheet and no administrative follow-up is required.
  • Insurance against the debtor’s insolvency risk, i.e. cover in the event of non-payment of the invoice on the due date.

Invoice financing works a bit like a “marketplace”, bringing together companies with cash shortages and companies with surplus liquid assets looking for an attractive, secure investment.

How does it work?

Each solution available on the market has its own specific features, of course, but the basic principles remain the same. Unlike traditional bank factoring, where the factor itself (usually the bank) manages the advance payments and follows-up with debtors, invoice financing works a bit like a “marketplace”. It is a digital platform that brings together companies with cash shortages and other companies with surplus liquid assets looking for an attractive, secure investment. The service provider in charge of the digital platform on which the various parties meet is not a factor, strictly speaking. Here are the main stages involved in invoice financing:

• • Once they have been recognised as eligible for the service and have registered on the online exchange platform, sellers can put their invoices up for sale.
  • A buyer accepts the invoice and pays the service provider via the platform. The amount paid by the buyer corresponds to the total amount of the invoice less their discount (the return on the investment they have made).
  • The service provider transfers the full amount of the invoice to the seller, less the various fees negotiated beforehand: service fees (remuneration of the service provider), insurance fees and financial fees.
  • The service provider notifies the debtor and provides administrative follow-up.
  • In principle, the debtor pays the invoice amount to the service provider by the due date at the latest.
  • The service provider transfers all the funds received from the debtor to the buyer.

Please note that not all invoices are eligible for this type of service. To be accepted, invoices submitted must be certain, liquid and payable. Here is a non-exhaustive list of potential restrictive conditions:

• • invoices must be “B2B”, i.e. addressed to private companies based within the territories covered by the service and in an accepted currency. These are never invoices sent to private individuals.
  • invoices must be for a minimum amount (generally a few thousand euros) and be due at a sufficiently late date to allow the service to function properly (around 30 days or more between the invoice being placed online and its due date).
  • the goods or services covered by the invoice must have actually been delivered or provided. This means that the service does not support deposits on orders or advance billing.
  • etc.

As the service provider works in partnership with an insurer to cover unpaid bills, the seller does not have to worry about what happens if the debtor defaults on payment. The only exception is in the event of a dispute, where the seller remains liable. Otherwise, the insurance covers the proven or presumed risks of insolvency of the debtor.

This service makes it possible to pay invoices quickly, significantly reducing the risk of non-payment and greatly reducing the administrative work involved in following up on invoices.

What are the advantages?

Invoice financing makes it possible to pay invoices quickly via an always-accessible digital platform, significantly reducing the risk of non-payment and greatly reducing the administrative work involved in following up on invoices. Another major advantage is that this solution in no way affects the creditworthiness of the company using it. This is one of the big differences with traditional factoring, but it’s not the only one.

• • Eligibility is not based on the seller’s financial situation, but on that of its clients (debtors). This makes the solution accessible to many start-ups or (very) small and medium businesses that may be excluded from traditional bank factoring or other credit solutions.
  • It’s quick to set up, the charges are transparent and there are no financial penalties for late payment by the debtor. Apart from cases of dispute where the seller is liable, there is full cover against the risks of late payment or non-payment of invoices.
  • The seller does not have to provide any funds as a guarantee or personal security.
  • Unlike traditional factoring, an annual commitment is not automatically required.
  • There is fast, 100% financing of the invoice amount net of costs incurred. Traditional bank factoring only pre-finances a percentage of this amount and only pays the balance once the invoice has been paid by the debtor.

For the company buying the invoice on the platform, the solution not only offers profitable investments, but also the satisfaction of investing in the real economy and supporting other entrepreneurs. What’s more, the investments are relatively secure in that the invoices are only put up for sale after an accounting audit of the debtor and an operational audit of each invoice.

What about the disadvantages? Apart from the cost of the service, you should be aware that invoices and clients are analysed before being accepted or rejected. Not everyone likes that. What’s more, the quality of the relationship with your clients is likely to be affected if it goes through an intermediary. In order to maintain a good commercial relationship and avoid misunderstandings, it is important for the company using invoice financing to be transparent with its clients, who will be asked to pay their invoices directly to the service provider.

What are the costs?

Here again, each solution has its own cost system and it is not for us to highlight one of them to the detriment of the others. That said, there are potentially two main types of costs.

• • Fixed costs, which cover the cost of subscribing to the service for a defined period and, where applicable, the costs associated with submitting each new invoice. These charges vary according to the service requested: an à la carte formula for occasional needs, management of a large and constant volume of invoices, sale of a large volume of receivables to rapidly improve the accounting situation, etc.
  • Variable costs per invoice, which cover the buyer’s remuneration, the service provider’s commission and the insurance premium. Calculated as a percentage of the total invoice amount, this cost varies according to the value of the invoice, its due date, the quality of the debtor and the total volume of invoices processed.

Calculated as a percentage of the invoice amount, this cost varies according to the value of the invoice, its due date, the quality of the debtor and the total volume of invoices processed.

Who is it for?

Invoice financing is available to companies of any size and in any sector, as long as they mainly serve professional clients (Business-to-Business). From the self-employed business looking to simplify its life to the fast-growing listed company that can’t afford any delays in its cash flow, invoice financing is intended for any company issuing eligible invoices according to the criteria mentioned. This may be of particular interest to the following:

• • Companies that do not have access to credit because they do not have sufficient guarantees.
  • (Very) small to medium businesses wishing to improve their cash flow on a one-off or recurring basis, partially or totally.
  • Start-ups, which often have limited debt capacity because their financial history is too recent or they have limited personal guarantees.
  • Fast-growing companies that have exhausted their existing credit lines and are having difficulty obtaining extensions.
  • Companies which, faced with problems of arrears or unpaid invoices, are experiencing cash flow difficulties or which wish to improve their debt capacity in anticipation of future development projects.

Would you like to optimise your cash flow, access cash quickly and focus on developing your business? Alongside traditional short-term financing solutions, invoice financing presents itself as a complementary approach that deserves careful consideration. All the more so as it avoids some of the limitations of traditional bank factoring. Speak to your banker!