How Invoice Finance can help your business 

What is invoice finance?

Invoice finance is a funding option, that means instead of waiting weeks or months to get paid, you can secure a percentage of the value of your invoices quickly and easily. It’s suitable for small or medium-sized companies that have a minimum of £30,000 annual turnover and get paid by invoice in 14 days (or more).

Typically, an invoice finance company will provide up to 90% of the value of your invoices immediately. Then these funds can be used to bolster your cash flow, or even to invest in an area of your business that perhaps needs funding.

It can be a great addition for businesses that have few assets to offer as collateral for a bank loan because this then means that their unpaid invoices are the collateral. It allows businesses to have no need for additional security.

How does it work?

• It is important that you ensure you issue invoices to customers on completion of the work – typically with payment terms of 30 to 90 days.

• Once you’ve set up your invoice finance facility, the lender will allow you to borrow money against your receivable’s ledger.

• The invoice finance company advances you up to 90% of the value of the invoices, sometimes within as little as 24 hours.

• Your clients pay their invoices into the finance company’s trust account.

• The finance company will charge a service charge plus interest on any money borrowed.

Different types of invoice financing:

There are two broad sub-types: Invoice financing (also known as invoice discounting), Invoice factoring (also known as account receivables financing), and then there is also Selective invoice finance (choosing to finance specific customer accounts).

Some differences include things such as ‘selective receivables financing’, but the main difference is who collects on the unpaid invoices. These variances can affect the percentage of the sum of each invoice that is immediately provided, and the fees and interest charged.

What are the advantages?

As with most things, there are some pros and cons with this funding option. In terms of the good:

• Your unpaid invoices are acting as security for the loan (no risk to assets).

• You could get invoice finance funding within 24 hours, rather than waiting for a bank loan to be approved.

• Once your business’ turnover increases, you’ll be able to access more cash and continue to improve your business cash flow.

• It speeds up the business invoicing process, saving you time.

• It will help ensure your receivables ledger is up to date.

What are the cons?

In terms of its downfalls:

• You may be held accountable if your client doesn’t pay their invoice, and you may also have to pay short term fees in general for using the services.

• Confidentiality: With invoice factoring, you’re not the one handling the credit control process, and this could impact clients’ perception of your business.

• There are longer-term costs, consider interest rates and the processing fees lenders charge if you choose invoice factoring.

How do I apply for Invoice Finance?

There are requirements that you must meet to be eligible for invoice finance. Of course, each lender is different but there are certain things they’ll be looking for.

For example, you must have a trading history to prove that you issue invoices to your clients. The lender will need to review your financial statements, clients, and assess their payment habits.

The lender is likely to complete an initial audit of your receivable’s ledger and will gather a sample of information, such as copies of sales invoices, purchase orders, delivery notes and remittance advices from customers. The lender will want to understand your invoicing process and ensure you have good internal controls around credit control.

You can use Funding Options to compare invoice finance products and find the best finance solutions on the market.

Still have questions?

If you still require advice and guidance on this topic, you can always get in touch with us at any time here.