Invoice finance explained – Full guide on who to use in the UK
Invoice financing is borrowing money based on the amount your customers owe your business.
This works by using unpaid invoices as money you will receive instead of waiting for payment terms.
Invoice financing lets you receive the most cash immediately, so you don’t have to wait for payment; this could be anywhere from 14 days up to 90 days or more.
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What is invoice financing?
Invoice finance is easy to understand. Instead of waiting for customers to pay your invoices, lenders advance most of the value right away. This means that you are paid more quickly for work completed to concentrate on your business.
Invoice finance is available to businesses that regularly invoice for work. Invoice financing is one of the most effective ways to reduce cash flow problems and get paid more quickly for work completed.
It’s a great way to ensure your business has cash flow so you can continue growing without worrying about your finances.
Invoice finance provider benefits
Invoice financing is like any other funding option. There are pros and cons. There are some advantages to choosing either option:
- Quick cash for your business – The apparent advantage to invoice discounting is the ability to raise cash for your business quickly. You can get it as soon as the invoice is issued. It can be used to grow your business, pay wages or buy more stock.
- Faster turnaround – Invoice financing is much faster than other types of business loans. Submitting invoices to invoice financing means you can avoid waiting for payment again.
- No risk to your assets – Invoice financing is an unsecured business loan that replaces your invoices. You don’t need to give up any of your company’s physical assets. If they need security, it will be classed as a secured business loan, and security will be required for the lender.
- Increases credit sales – Invoice discounting can convert credit sales to cash. This allows SMEs to experience faster growth and development.
Different types of invoice finance providers
Businesses have two options for invoice financing: invoice discounting or invoice factoring. Businesses have the option to decide how much control they want over their finances with both finance products.
Both products offer the flexibility to manage your cash flow or let the lender do it for you. You can get cash flow loans if you need these; they are specialist loans.
Let’s have a closer look at two product categories in invoice finance below:
Invoice Factoring is where a lender is most involved. You can rely on them to provide credit control services to ensure your customers pay on time.
Listed below are some key points to be aware of:
- Customers will be able to tell that you use a factoring service
- Potential customers can be credit checked by factoring providers
- It is easier for small and early-stage businesses to secure financing
Invoice discounting is where you control the credit for any payments made to your account.
This is the most accessible form of invoice financing and requires more work from a business. However, it can be time-consuming.
The following are key features of invoice discounts:
- For businesses with a higher turnover, invoice discounting is usually available.
- You’ll need to maintain your credit control to ensure that customers pay on time.
Restrictions on invoice financing facilities
Invoice financing is a type of loan that you can consider, but there are some things you need to keep in mind. The following are some of the most important restrictions that business owners should consider:
- Customers will need to be from other businesses – Invoice finance is not available for commercial invoices. This means that your customers must be other businesses and not the general public.
- Invoice factoring – You will have to chase payments if you apply for invoice factoring. This could impact your client relationships and increase the risk of causing damage.
- Longer-term expenses – While invoice financing can be a great way to provide cash flow for businesses in the short term, it can also have long-term financial costs. Factoring invoices can be a great way to save cash. However, you need to consider lenders’ interest rates and processing costs.
Invoice financing has many advantages, but there are also some things you should consider.
There are other options available from invoice financing companies if you aren’t sure what option is best for your business or if you need something more flexible such as unpaid invoices insurance.
Spot factoring and select invoice financing
Spot factoring lets you select specific invoices to finance with selective invoice finance. You can choose to take an ad-hoc approach and receive funding as you need it.
Because they are not full-facility products, selective invoicing products differ from discounting and factoring. You can select which invoices to finance and continue with regular business.
This is a great option for companies that clearly understand their cash flow needs. However, it can be more complex than discounting or factoring to secure the money. Invoice finance, regardless of the facility you choose, can help improve your cash flow.
Because they aren’t full-facility products, these products are different from discounting and factoring. You can pick and choose which invoices to finance and then deal with the rest of the invoices as usual.
Here’s an example of invoice factoring in business
Sarah’s Interiors Ltd is working on a major new project. Sarah is aware that she will need to purchase additional materials and hire another staff member to complete this job. However, she won’t get paid until it’s completed.
An old client owed Sarah £5,000 for a completed project. However, the invoice has a payment term of 30 days.
Sarah agrees to an invoicing finance agreement that will pay her 85% upfront and the remaining fees and charges at 3.3%.
Breakdown:
Businesses can release up to 95 per cent of the invoice’s value within 24 hours. Instead of waiting for customers to pay, they don’t have to wait 30, 60, or 90 days.
While this may sound like the best option for your company, there are some drawbacks to using an invoice financing facility instead of traditional funding sources such as a bank overdraft or loan.
To help you decide if invoice finance is right for you, we’ll take a closer look into the benefits and drawbacks below.
You can start your application below now online:
Benefits of invoice finance for your business
Invoice financing offers a unique set of benefits unmatched by any other source for business finance.
(1) Increased cash flow
Invoice finance has many advantages. The main reason so many companies choose to use it is the positive impact on cash flow. Businesses are better able to quickly release funds held in invoices and take advantage of new opportunities.
(2) The confidence to extend payment terms
Smaller businesses can be held back by waiting 30, 60 or 90 days to receive payments. Customers may leave if they are not offered payment terms that are standard in their industry.
Businesses can extend payment terms to customers using invoice finance without worrying about how it might affect cash flow.
(3) Funding is available quickly
A provider can usually set up an invoice finance facility within one week. Once an arrangement has been made, funds can usually be released from invoices within 24 hours after they are issued to customers. This allows you to quickly respond to cash flow shortfalls and raise funds to pay for other business expenses.
(4) The majority of businesses satisfy the qualification requirements
Invoice finance is much easier to get than other forms of funding. Invoice finance is available to most companies with no financial problems and good customers with no adverse credit records.
For startups and small businesses with no money to start or are unable to access traditional credit sources, factoring can be a viable source of financing.
(5) Your business’s growth will dictate the amount of money you can borrow
The invoices’ value and quantity determine the credit line. This means that the amount of funding available to you will increase in line with your revenues.
Invoice finance is a financial platform that supports your future growth as you can also access more capital than you might get from a small business loan or bank overdraft.
(6) Security is not required
Invoice finance agreements do not require assets to be secured. In many cases, the invoice is sufficient to provide only security. Invoice finance can be an option for small businesses with limited assets that cannot access other financial products.
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The disadvantages of invoice finance
There are always drawbacks to any source of financing. You should know that invoice finance is not for everyone and can have a variety of drawbacks so you can make informed decisions.
(1) It solves an extremely specific problem
Invoice financing is specifically designed to address the issue of insufficient cash flow.
This finance type is unsuitable for customers who pay their invoices on time and under reasonable terms.
Other forms of financing may be better if you need capital to purchase new machinery and equipment.
(2) It might be more expensive than other types of finance
Invoice finance is now more affordable than ever as the competition has increased.
It may not be the most affordable source of financing and it is a good idea to get quotes from several invoice finance providers so you can compare their costs with other credit options.
(3) Customers might be aware that an arrangement exists
Customers may not be aware that there is an invoice financing facility. It all depends on whether you choose to factor or discount.
Factoring companies are responsible for collecting payments from customers and will deal directly with them.
This could cause you to lose the customer relationship. Invoice discounting allows businesses to keep responsibility for collecting payments, so customers don’t know that the arrangement exists.
(4) Customers must come from other businesses
Invoice financing is only available for commercial invoices sent to another company. This type of financing is not available to businesses that sell products or services to the public.
(5) If you have bad credit, it can be hard to get invoice finance
As with any business loan, it is hard to get approved for finance when you have bad credit. If you have had a business go insolvent then it will be incredibly hard to get approved.
If you have impaired credit, it might be best to look at a small business loan for bad credit over invoice finance, as you have a higher chance of being approved this way.
You may be required to put down a personal guarantee if you have impaired credit.
Read more guides below on business finance which may help you decide which is right for you:
- Business loans vs personal loans
- Business loan checklist
- Do business loans affect personal credit?
- How do business loans work?
- Funding for expanding businesses
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