All businesses, regardless of their type or industry, face cash flow challenges at some point during their operations. Coming across such problems isn’t necessarily a sign of financial instability, unlike popular opinion. The main objective here is how a business responds to these cash flow issues.
Invoice factoring is a popular type of invoice-based financing solution. In this blog, we will discuss a specific version of it called discreet invoice factoring. We will explain what it is, how it works, how it differs from regular invoice factoring, and the benefits it provides businesses in the UK.
What is discreet invoice factoring?
Discreet invoice factoring, also known as confidential invoice factoring, is a type of factoring in which the factoring company works in the background to keep the knowledge of the business’s financial arrangements private from its customers. This means that the factoring company discreetly manages the administrative tasks related to invoice collection. The customers are not contacted directly, and the business continues to interact with its customers as usual.
The business sells its unpaid invoices to a third-party provider and receives a 70% to 90% cash advance on the total invoice value. These funds are used to temporarily strengthen the business’s cash flow and cover any urgent expenses. The remaining 10%-30% of the funds are sent to the business towards the end of the agreement when all the invoices are paid, and the factoring fee is deducted (1%-5% of the total invoice value).
How does discreet invoice factoring work?
The basic procedure of discreet invoice factoring is similar to regular factoring, except for a few differences, like the privacy clause in the agreement and a trust account. Let’s discuss the process in detail and learn what these terms are:
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1. Generating invoices
The business issues an invoice against a unique invoice number to its client. Invoices are issued to request complete payment only after the requested services or products are delivered. The document contains the deal’s relevant details, such as the products delivered, the date of completion, the payable amount, and the payment duration.
2. Factoring invoices
The business decides how many invoices are to be sold to the factoring company. Single invoice factoring allows you to factor as little as one invoice, but some businesses sell a large portion of their total invoices or the complete sales ledger.
3. Evaluation of invoices
The factoring company receives the invoices and analyses them to check their legitimacy. Furthermore, the invoices are evaluated to weigh the creditworthiness of the client and the business. This information is then used to determine the risk associated with these invoices, according to which the exact factoring fee is calculated.
4. Cash advance
After the evaluation is completed, the cash advance (70%-90% of the total invoice sum) is transferred to the business within 24 to 48 hours.
5. Discreet invoice collection
The factoring company secures the payment collection process, so your privacy remains intact. Typically, a trust account is set up in the business’s name, so customers remain unaware of the change in management of the invoice collection process.
6. Completion of the agreement
The discreet invoice factoring agreement comes to an end when all the unpaid invoices are cleared. Once it happens, the factoring company deducts the factoring fee from the 10%-30% they still have and transfers the remaining amount to your business. If you want to re-initiate the agreement, the process starts all over again.
7. Non-payment scenario
In a case where the customer fails to clear the complete invoice value, the question arises as to who will bear its loss. Well, the answer depends on whether the factoring agreement is recourse or non-recourse. In case of a recourse agreement, the business is liable for any unpaid invoice. However, a non-recourse agreement transfers this responsibility to the factoring company.
Traditional vs discreet invoice factoring
In traditional invoice factoring (also called debt factoring), the factoring company is completely in control of the invoice collection process. It interacts with the customers, sends payment reminders, and follows up on the unpaid invoices. Even though it reduces the administrative burden of keeping track of customer payments for the business, it also means that the factoring company becomes the face of your invoice collection process. As a result, customers become aware that your business is working with a third-party financial provider.
- In some cases, customers remain indifferent to this information, but in others, they may make groundless negative assumptions about the financial health of your company. This generally originates because of the popular notion that working with a financial provider is a sign of financial trouble. Regardless of whether it is true or not, such perceptions can negatively impact your business’s reputation.
- Discreet invoice factoring, however, works as it says. The process remains confidential to the customers. The factoring company doesn’t contact your customers independently; if it does, it acts as your business’s representative.
Benefits and drawbacks of discreet invoice factoring
| Benefits of discreet invoice factoring | Drawbacks of discreet invoice factoring |
|---|---|
|
Effortless client relationships |
Need for extra caution |
|
No debt incurred |
Higher costs as compared to traditional invoice factoring |
|
Provides flexible terms |
|
|
No obligation on the usage of advance funds |
|
Advantages of discreet invoice factoring
What advantages does discreet invoice factoring provide over traditional invoice factoring? Let us take a closer look at each of them:
Smooth client relationships
Discreet invoice factoring allows you to deal with your clients as you would without a financial agreement. Even when you outsource the process of invoice collection, your business remains in charge of your customer interactions. Your business can continue to provide high-quality customer service to the clients without any disruption.
Not a debt
Invoice factoring, in general, does not appear as debt on the business’s accounting records. Instead, it is simply categorised as selling your future receivables, referring to the unpaid invoices.
Flexible invoicing
Discreet invoice factoring provides quick access to funds based on the value of the invoices you factor. The factoring company advances a percentage of the total invoice amount, which means the more invoices you factor, the higher your advance will be.
No restriction on advance usage
With discreet invoice factoring, there is no obligation as to how the advance funds must be spent. It depends on your business’s decision: whether you want to spend them to restock your inventory, pay your employees, launch a new product or kickstart a marketing campaign.
Disadvantages of discreet invoice factoring
Discreet invoice factoring has some disadvantages as well.
Higher costs
Discreet invoice factoring comes at a higher price than traditional invoice factoring because of the additional security aspects and the privacy clause added in its agreement. The factoring company associates an additional risk with such settings, where the customers must not be aware of the arrangement.
Need for extra caution
To make sure that the confidentiality of the agreement is maintained, the factoring company and the business must take extra caution throughout the process. This requires continuous extra efforts and cooperation from both sides.
Should your business consider discreet invoice factoring?
Discreet invoice factoring can be the ideal choice for businesses that want to maintain smooth client relationships while also improving their cash flow. It is specifically suitable for businesses that want to maintain a professional look and not disclose the details of their financial settings to their customers. If such features are valuable to your business, discreet invoice factoring is a smart move.
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At ComparedBusiness UK, we are experts in saving you time and money. Simply submit your requirements in under 2 minutes, and we will get back to you with quotes from a list of top invoice finance providers offering discreet factoring services. This service will cost you nothing.
FAQs
The main difference lies in confidentiality. In traditional invoice factoring, the factoring company manages the invoice collection process directly and contacts your customers for payment, making them aware of the arrangement. In discreet invoice factoring, the process remains private.
Yes, discreet invoice factoring typically involves slightly higher fees than traditional factoring. This is because of the added privacy measures and the increased risk for the factoring company, which must manage collections without directly communicating with your customers.
