If you’re a business that relies on customers paying invoices for income, you may have had situations whereby you have had to wait for a long period of time to elapse before receiving any monies owed.
The payment terms of these unpaid invoices can range anywhere from two weeks to three months, meaning that there could be a period of time where your business suffers with cash flow.
However, invoice finance is a way that you can borrow the money against the invoices that customers owe you.
How does it work?
It’s a relatively basic process.
Instead of waiting for your invoices to be paid by your customers, a lender will advance you around 90% of the invoice straight away.
This will see you get paid faster for the work you have done, meaning you can put it back into working capital and continue running your business as normal.
For example, invoice financing could be the answer if you have a big project on the horizon that requires the company to invest in additional raw material.
The chances are that you are going to be paid the majority of the contract upon its completion, leaving your company’s cash flow to potentially suffer in the meantime.
By taking out an invoice finance facility, you could, for example, raise 85% of the value of outstanding invoices back into your business to enable you to prepare for that next project.
You would simply show the invoice to your chosen lender, ideally picked by a broker who is an expert in invoice financing, to receive your advance.
What about the other 15%?
Once your customer pays the outstanding invoice, the full amount will be sent to the lender’s bank.
You will receive the rest of the invoice amount after this, minus the fees and charges which vary depending on the lender.
Are there variations of invoice finance?
Whilst all invoice financing works in the way above, there are three main types of invoice finance.
Invoice Discounting and invoice factoring are the two most distinctive types of invoice finance. The main difference between the two is determined by who possesses control of your sales ledger.
When using invoice discounting, you will retain control of your sales ledger and will continue to chase payment from customers in the usual way.
With invoice factoring, however, the funder will take over the role of managing your sales ledger, credit control and the chasing of payment.
The third, lesser known, type of invoice finance is selective invoice finance, or single invoice finance.
This differs to the other types of invoice finance as you don’t agree the whole sales ledger with the funder.
Instead, you select which invoices you’d like advanced, giving you the flexibility to adjust your cash flow by either ‘selling’ a number of invoices or just a single one.
With the other types of invoice finance, you will usually be able to get an advance of around 90% of the total value, but with selective invoice finance, it’s possible to be advanced 100%.
However, when using single invoice finance, the lender’s look at your customers rather than your own business for their risk assessment, meaning only those businesses that trade with credit-healthy customers are likely to be able to use this facility.
How do I know which type would be best-suited for my business?
It all boils down to how much control you want to retain. Invoice factoring means the funder will retain credit control functions to allow you to focus on the running of your business instead of chasing payments.
Invoice discounting is the most basic form of invoice finance as you keep control of your books, but it is generally only available to those businesses that have been around for a long time with a high turnover.
What are the drawbacks of invoice finance?
You should take note of some of the potential drawbacks of invoice finance.
There tends to be a negative stigma around this type of finance, especially invoice factoring, as most customers prefer to deal with you directly, rather than being sent to a third party and it may be seen as though your business is unable to deal with debt collection.
As you will be paying a fee for the facility, this obviously becomes an additional cost and reduces your profit margin.
How do I get started?
Invoice finance gives you a flexible approach to the way you trade but it can be expensive.
If you need funding as soon as possible or for the short-term, you should consider all options including bridging loans and business loans, before you settle on any given one.
Speaking to one of our experts will allow you to look at all the options available to you and ensure that you choose the option most suited to your business.
Call 0333 444 0221 or email firstname.lastname@example.org to contact a member of our team.