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What is invoice finance?
Invoice financing is a way of releasing funds for a business, using outstanding invoices as security.
It’s a highly flexible form of borrowing which can be a very effective way of easing cashflow peaks and troughs – when you know the business is profitable if all your outstanding invoices are paid on time.
If you’ve got an invoice finance deal in place, your provider will usually lend you a significant percentage of the invoice value as soon as it is issued, avoiding the need to get bogged down in time-consuming red tape.
Once the invoice is paid by your customer, the lender will get their money back – plus interest and charges, leaving you to pocket the rest.
The maximum you can usually borrow is 95% of the value of your sales invoices. So, for example, a £10,000 invoice would release £9,500 into your bank account within 24 hours.
Why take out invoice finance?
Late payment of invoices is one of the most damaging factors to a company’s survival – particularly in the SME sector, where it can often be make-or-break.
So, if you don’t want to wait up to three months, or sometimes longer, for your suppliers to cough up the funds they owe, invoice financing can be a very efficient way of evening out your cashflow, and reducing risk.
Sometimes, you can pass on the credit control responsibilities to the invoice finance provider too, which removes the hassle of having those difficult conversations with your suppliers.
Invoice finance is widely used across many business sectors, including manufacturing & engineering, transport & logistics, construction, retail, security and the print industry.
But any company which supplies products or services on payment terms of 30 days or more can stand to benefit.
Which product is best for me?
The three most popular forms of invoice finance are Invoice Factoring, Invoice Discounting, and Selective Invoice Finance.
Invoice Factoring is the deal which passes over the credit control responsibilities to your lender, so they chase debtors on your behalf to make sure pay up on time. Smaller, or newer businesses often find this option a great help.
Invoice Discounting is similar, except for the fact that the borrower remains in charge of credit control. Why would you choose this when it’s more time consuming for you? Possibly if you don’t want your customers to know you are using invoice finance.
Selective Invoice Finance, sometimes referred to as ‘spot factoring’ allows businesses to raise funds against more than one invoice. This can be a good route for companies not needing regular invoice finance, but looking to put money into the business quickly.
What’s it going to cost?
There is no one-size-fits-all answer to this, as it is based on the financial strength and stability of your business – and your customers too.
There will be a service fee which will be based on your turnover, and a discount fee which is the interest charged on the funds you borrow. The quicker your invoices are paid, the less of this you will pay.
However, you also need to bear in mind that if your customers are not credit worthy, some lenders will restrict the amount released, or even exclude those invoices completely.
Who offers the best invoice finance?
Borrowers have never had a wider choice. High street banks used to be the automatic first port of call, but now you can try a wide array of specialist lenders, or peer-to-peer lenders too.
The banks will tend to offer the cheapest rates and fees, but want to deal with companies with a strong balance sheet, successful trading history, and plenty of security.
Specialist lenders such as challenger banks will be more flexible and make the process much quicker, and peer-to-peer lending is becoming increasingly popular in the invoice discounting sector too.
Whichever route you choose, you will need to fill out an application form, provide a list of your customers, details of any outstanding debts, and full financial records including accounts, sales ledgers and bank statements.
Questions and answers
- Can a start-up business qualify?
- Yes, as long as your payment terms are 30 days or more. New businesses often stand to benefit the most from invoice finance, allowing them to concentrate on growing their sales
- If I’m a UK-based business, will I automatically qualify?
- Provided that you raise invoices to creditworthy companies, the answer is almost certainly yes. Remember, though, that your invoices must be sent to other businesses, not direct to consumers. Invoice finance is available for sole traders, partnerships, limited companies, or limited liability partnerships
- I have urgent cashflow troubles – how quickly can I get accepted?
- Usually in just a few days. If time is of the essence, using an expert can help to speed up the application process
- Can invoice finance help with recovering bad debts?
- Providers are able to offer full bad debt protection, to protect you from losses in the event of your customer becoming insolvent and failing to make payment. If you speak to an expert, they can explain a number of other add-ons which are on the market to provide additional business protection
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