What is Invoice Finance?

As economic uncertainty and price hikes loom as a dark cloud over the country, businesses, discontented about the current lending conditions, are clearly casting a wider net when seeking out finance options that are available to them.

It is in this circumstance that many have come across Invoice Finance; often with expressed reactions of surprise that they were not aware of the finance facility and its obvious benefits.

So What is Invoice Finance?

Invoice finance is the term used to describe funding solutions that enable your business to release money tied up in your sales ledger and outstanding invoices.

In simple terms, monies owed to you by your customers are assets of your company.

And so, in using such assets and more easily accessing cashflow and grow, invoice finance removes the lengthy payment period that businesses have to wait in order to ensure that cash flows. The lender – from independents to high street banks – would make available to you a pre-agreed percentage (based on the strength of your invoices and debtors) of between 70% to 90% of the value of your unsettled debt.

Once your customers’ debt payments have been collected – by either by your company or the lender – the cash already advanced is paid back to the lender, and you receive the remaining amount minus incurred fees.

Forms of Invoice Finance

There are two main forms of invoice finance: Factoring and Invoice Discounting. These are much the same with the distinct difference centred on the collecting process.

The former allows you to have your sales ledger and payment managed by your Factoring lender, although not in every instance – you could also use a service where you retain the ability to collect payments from your customers. Factoring can be applicable to smaller businesses that might not have their own credit managed department or indeed larger businesses with many customers and where it is more cost effective to have a professional outsourced collection service.

In contrast, invoice discounting operates solely as a funding line. It is most suited to companies with an in-house credit control or accounting team responsible for chasing and collecting payments from customers and can be confidential (i.e. customers are not aware that company is using this service).

For further information see our business advice article on The Difference between Factoring & Invoice Discounting

What makes you qualify for Invoice Finance?

  • Suitable to businesses that deals with and raise invoices to other businesses (B2B) in the UK.
  • Issue invoices with payment terms.
  • Factoring – Minimum turnover of £50,000 – (below this level it is generally not cost effective).
  • Invoice Discounting – Typically, a projected turnover over £200,000 with 3 year+ trading history and a proven ability to collect outstanding invoices.
  • Some sectors such as (Construction for example) might attract a requirement for additional collateral to be provided in view of the perceived high risk natures associated with this sector.

Can you use it with other finance?

Yes, you can, but why would you?

If you already have loans and/or overdrafts in place and have pledged a debenture on these and other assets – then invoice finance can be complimentary to existing facilities. This is principally due to the fact that the invoice finance advance is against a specific asset.

Hence, as long as the present provider is not including these within the scope of their present security then an invoice finance arrangement should be available to you.

There are over 4.8M small to medium enterprise (SME) businesses in the UK and latest estimates suggest that over £1M businesses could utilise this form of funding but are unaware of this fact! Despite this, the industry body (ABFA) has reported an 8% year on year increase in new users to this sector which further cements the view that awareness is growing.

How you can access invoice finance and why you should use it.

  • In the first instance speak to a broker – like Touch Financial. Their services are normally free and independent; they will have access to the whole market, and will often be able to secure you more attractive rates.

Why?

  • Typically invoice finance will release significantly more working capital availability to the business.
  • Costs will usually be slightly more than for a standard overdraft or loan, although a small % increase in fees should be outweighed as compared to the business benefits. – A good broker will take you through the potential benefits / disadvantages to allow you to make the right decision about suitability.
  • Stressed about late payments? Provides third party assistance in the collections process.

Where, for example, a business has little or no traditional assets to borrow against (such as cases of companies in the recruitment sector), your invoices can prove to be the catalyst to funding working capital growth.

More businesses are clearly realising the benefits of sales-related financing.


This business advice article by Kedisha Burnett from Touch Financial, the factoring specialists.

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