Invoice Finance: A Growing Form of Finance

In the past, businesses seeking finance were fond of queuing up at retail banks to seek funds. This trend is alienating with the growth of innovative forms of finance such as invoice finance.

It occupies the middle spot between the traditional lending mechanisms and more exotic forms of raising income.

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.

Simply put, a range of solutions allocating the value of funds against the value of unpaid invoices.

Invoice Finance turns into Cash.

Emergency liquidity makes invoice finance stand out from other forms of finance-ways to be paid most of what you are owed almost immediately. This eliminates the lingering payment period that you have to wait in order to ensure cash injections.

Businesses transfer their unpaid invoices to a factoring company, in return for an advance, typically in the range of 70-90% of unpaid invoices within the next working day, once approved. The percentage released is influenced by factors such as the quality of your debtors –the stronger the invoice, the higher the payment and vice versa.

Forms of invoice finance

There are two main forms of invoice finance: Factoring and Invoice Discounting. These are very similar but for the facts that;

  • With factoring, the factor company takes ownership of the client’s sales ledger management while Invoice discounting doesn’t include sales ledger management but a cash advance against unpaid invoices.
  • Invoice discounting is traditionally used by larger companies (say £1million turnover and above) who wish to keep greater control of their client’s relationship while factoring is traditionally used by SMEs.

What qualifies you for Invoice Finance?

Invoice finance could be right for your business if;

  • You sell on credit to other businesses/ government irrespective of your size-from a sole trader to multinational companies
    • If your annual turnover (including VAT) is £50000 or greater, factoring is your ideal solution
    • Typically, a projected turnover of £1million or greater puts you in an effective position using an invoice discounting contract.
  • You issue invoices with payment terms of between 15 to 90 days

Note: Collateral backing may be required in sectors such as construction given the additional risks associated.

Why invoice finance?

Invoice finance operates in a range of sectors including retail, distribution, recruitment and manufacturing and the reluctance of banks to offer credit terms to businesses especially those without tangible securities compels businesses to avoid high street banks.
This explains why thousands of businesses in the UK use invoice finance as a main source of capital. Below are the extra benefits invoice finance can offer you.

  • Upfront payment once approved which improves your cash flow and gets your business going in the short run. This brings about higher bargaining power with your suppliers.
  • Increased working capital which permits you to cover overhead costs
  • Fewer conditional requirements with little or no paperwork involved after the facility is established
  • Control over sales ledger management- no needless stressing about late and overdue payments.
  • Reasonably priced factoring fee which in some cases could be negotiable.
  • Facility grows in line with your business
  • Potential to release collateral security which eliminates some of the drawbacks of running a business.

How to access invoice finance?

Too often, it is advisable to speak to a finance broker such as Touch Financial (‘Asset based broker of the year 2011’) where they will thoroughly talk you through the various finance options available to you

Also, there is a risk of choosing a lender who doesn’t know your market because they will be less likely to lend in the first place and even if they do, they could have less confidence in your ability to succeed, which could cause them to withdraw facilities.

Our services are free and independent and specifically tailored to your sector. Call Touch Financial on 0845 388 9725

This business advice article by Sema Fongod from Touch Financial, the Factoring specialists.

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