Blog

Invoice Finance – Your Next Funding Choice?

invoice finance

The next six months are going to be challenging.  With the political and economic landscape uncertain and costs continuing to rise, business owners face a bleak outlook as they work to keep themselves moving whilst building protection from the inevitable challenges along the way.

It is vital that businesses focus on maintaining a flexible supply of cashflow to help them respond to the increasing operational costs along with any longer-term financial effects that a recession may bring.

Finding the right funding solution for your business can be a minefield as you navigate between the various options available to your business.  From the traditional mainstream providers to the wide range of newer, alternative funders, trying to understand which type of finance will match your business most closely and support you and your aspirations can be both confusing and challenging.

One popular choice with businesses today is Invoice Finance.  The flexibility that Invoice Finance brings to a business makes it a sensible choice in both favourable and challenging economic times

What is Invoice Finance?

Invoice Finance is a form of asset-based lending (ABL) because it uses a firms’ debtors as collateral.

Invoice Finance is a generic term for a range of funding solutions.  Invoice Finance specifically covers two types of finance – factoring and invoice discounting (it is also sometimes referred to as receivable financing, invoice factoring, accounts receivable factoring and accounts receivable financing – confusing isn’t it!).

Essentially a business signing up to an invoice finance facility sells its invoices to a finance company in exchange for an upfront payment instead of waiting 30, 60, 90 or even 120 days to get paid by their customers.  It is this immediacy of payment with an invoice finance facility that can be so beneficial to firms seeking to maximise their cashflow to enable their plans to be put into motion.

The Benefits of Invoice Finance

  • Fast access to cash – Invoice Finance provides an upfront injection of funds against the value of your outstanding invoices relieving cashflow pressures
  • Ongoing source of funding – An Invoice Finance facility releases up to 90% of the value of each invoice raised within 24 hours
  • Grows with your sales – with invoice finance the more you invoice the more finance you can access to invest in your business
  • Improved margins – Invoice Finance allows you to use your improved cashflow to secure early settlement discounts
  • Saves time – an optional sales ledger and collections service can be included with your Invoice Finance solution so you can focus on growing your business
  • Stay in control – An online account allows you to access information on your Invoice Finance facility allowing you to see what funding is available and up to date information on customer payments

What’s the difference between Factoring and Invoice Discounting?

Invoice Discounting is a finance solution like an overdraft.  It’s a finance only facility where you receive up to 90% of invoices as they are raised.  As part of the service, your customers will be credit checked giving you peace of mind that they will be able to pay your invoices.

Factoring is a finance and sales ledger management solution (sometimes referred to as Invoice Finance).  Again, you will receive up to 90% of the value of each invoice as they are raised but in addition to this the finance company will manage the collection of payments from your customers removing the time, cost and effort leaving you to focus on doing what you do best – running your business.

There are three additional points that you need to be aware of when looking at an Invoice Finance solution:

  • Confidentiality – An Invoice Finance solution can be totally confidential, so your customers are not aware of the finance companies’ involvement
  • Bad Debt Protection – The finance company may include a bad debt protection This can work in two ways – either it protects your business from a bad debt should a customer fail to pay you – this is called recourse factoring (especially important in today’s economic environment).  Or it protects the finance company – this is called non-recourse factoring.  The latter tends to be slightly more expensive as a solution as the cost of this protection is built in.
  • You can be selective – some finance companies offer selective invoice finance where you can choose a particular customer or invoice that you would like them to fund or have support collecting payment

How does Invoice Finance work?

  1. You invoice your customer once you complete a job and upload a copy of the invoice to your online account
  2. Receive your funding – the finance company will provide you with up to 90% of the value of each invoice raised within 24 hours
  3. The finance company collects payment from your customer leaving you to focus on running your business
  4. You receive the remainder of the invoice value – when your customer pays minus the finance companies fees

Invoice Finance – a good fit for you?

Invoice Finance works for a variety of businesses across a diverse range of industry sectors.  At whatever stage you find your business, you can feel confident that invoice finance is a good fit particularly if you are:

  • trading with other businesses
  • established and looking to grow
  • looking to improve cashflow
  • a new start business projecting £100k turnover
  • looking to buy another business, expand into new markets or cope with seasonal fluctuations

How is Invoice Finance Different from a bank overdraft or loan?

An overdraft or a loan is most commonly offered by a Bank, and they will set an agreed amount that you can borrow.  This amount is based on the historical performance of your firm, and it is unlikely that you can negotiate a higher limit if required.  In this instance you may find that it is not sufficient for your current needs.

A loan will see the full amount being paid to you and you committing to a monthly ongoing payment over an agreed period – normally 3 years – to repay that loan and interest in full.  An overdraft is a limit that you can overdraw up to.  It is more flexible than a loan in that you only use what you need to.  However, if you need to increase your overdraft limit there will be a negotiation and fees applied for this renegotiation.

Invoice Finance is not borrowing.  You are selling your invoices to a finance company for an agreed amount. The amount of funding grows in line with your sales and does not need any renegotiation, so you do not need to worry as the funding limit grows with you.

In summary

Invoice Finance can be an excellent option for businesses that need a flexible and ongoing supply of cashflow or who aren’t able to secure a conventional bank loan.

Invoice Finance is a smart way to infuse cash into your business without taking on additional debt. It’s a great funding option for a wide range of industries including recruitment, manufacturers, distributors, and service led sectors.


More Great Reads

Recession Proof Your Business Blog ImageBlog
08.31.22

Recession Proof Your Business

The Bank of England has raised interest rates again by 0.5% to 1.75% as the UK battles to prevent inflation running out of control.  It’s the latest in a series…
BlogNews
05.31.22

New Financial Year – Get Your Business Back On Track

With last month marking the financial year end for many firms, business owners have been looking forward and using the start of their new fiscal calendar as an opportunity to…
Charts on a computer screenBlog
03.01.22

How Asset-Based Lending Can Improve Cash Flow During Seasonal Off-Cycles

Asset-based lending works well for all sorts of companies that are growing quickly, but if you own a business that experiences seasonal fluctuations, this loan option can be especially beneficial.…