Invoice finance is a key solution for any business aiming to improve cash flow. It’s usually seen as a short-term option when dealing with temporary invoice issues from customers.
However, with late payment a recurring problem for many SMEs, invoice finance provides long-term support when used on an ongoing basis. It also facilitates growth across your business if you utilise it effectively.
We explore why invoice finance is an excellent growth and cash flow management mechanism.
- Why does invoice finance matter?
- How does invoice finance work?
- Why does invoice finance boost growth?
Why does invoice finance matter?
Late or missed payments plague many businesses. A report in 2021 predicted UK SMEs were chasing £50 billion in late payments, highlighting that this is a sizeable and common barrier.
Repeated late payments from customers quickly lead to disruption once the impact on cash flow sets in. It can leave you unable to meet your financial commitments, such as suppliers and other bills, hampering productivity.
Poor cash flow makes it harder to survive obstacles, with reduced reserves available to cover unexpected costs or navigate periods of lower revenue.
It also reduces the available capital in your business, preventing you from investing in growth strategies or accessing the resources you need to optimise your operations.
Invoice finance seeks to tackle the ramifications of late payments before they occur, making it a valuable form of external funding for many SMEs. 42% of UK business owners say that invoice finance offers increased financial freedom, showing the positive benefits it can bring.
How does invoice finance work?
Invoice finance provides short-term loans that unleash capital tied up in your unpaid invoices, up to 90% of the total value depending on your sector. The terms range between 30 and 120 days after the invoice date.
It comes in two forms:
- Factoring – giving control of the lender, who chases down payment on your behalf
- Discounting – you keep control of payments, allowing you to retain confidentially
There are pros and cons to each, though factoring tends to be the choice for smaller companies.
If your turnover is higher and you strive for confidentiality, invoice discounting may be a better solution. With such a facility, you can receive funding every time you send an invoice to a customer, with a proportion of the total value available from the lender. That said, you can choose either single or selective invoice discounting rather than the whole of your debtor book.
As you send out invoices as orders are completed, the electronic files are uploaded to the lender. As agreed with the lender, a proportion of each invoice will then be available to drawdown, but it is up to you as to how much of your total facility limit your drawdown.
Utilising invoice finance in this way allows you to ensure a steady flow of working capital every month, regardless of any late payment issues you may face.
Why does invoice finance boost growth?
Invoice finance is a key resource for managing the cash flow issues associated with delayed payments. However, it also has sizeable benefits for your growth plans.
One of the most significant challenges any SME must overcome is maintaining positive cash flow across their operations. It’s crucial to survival. Invoice finance boosts this, by allowing businesses to drawdown funds as needed and enable them to pursue their growth goals.
One in four owners also say invoice finance prevents time wasted chasing payment, allowing them to focus on growing their company instead.
The capital unlocked from your unpaid invoices can be used anywhere. This could include training, staff salaries, equipment, supplies and premises, covering the various elements associated with growth.
It’s also possible to raise funding through other sources, such as investment or commercial loans, while using an invoice finance facility. You can still apply for other routes of funding in your mission to finance expansion and pool together more considerable sums as a result.
A crucial part of scaling your business is bringing in new customers. Each customer carries the risk of late payment, so having invoice finance in your arsenal mitigates this and allows you to take on new business without the fear of any cash flow implications.
As you expand, balancing cash flow will become even more integral. When you take on new customers, you need to pay additional costs to cover supplies and labour, alongside other increases in your variable costs. Invoice finance enables you to maintain cash flow to cover your expenditure consistently.
Invoice finance is also highly flexible, meaning it grows as your business does. As your turnover grows, so does the amount that is available to you to drawdown, thus providing a consistent stream of working capital. This means you can continue to increase your sales levels while delivering the best possible quality without concerns about the cash flow implications.
Finally, an invoice finance facility is typically cheaper than an overdraft or other lending streams. It’s a financially responsible form of funding to empower growth with minimal cost to your company.
However, it is still important to have an excellent credit control system in place to bring in your owed invoices as it will reduce the costs associated with invoice discounting.
Cash flow is crucial to any business. Late payment threatens this for many SMEs, affecting your company’s ability to grow.
In these scenarios, invoice finance is a saviour. It enables small businesses to manage cash flow, even with payment issues. When used as a regular facility, it provides a constant injection of working capital that many companies sorely need.
With improved cash flow, more SMEs can focus on their growth ambitions with the financial flexibility they need to fund expansion. This makes invoice finance a valuable tool for your long-term growth.
We have a range of invoice finance providers in our network, allowing us to find the perfect match for your needs. Talk to us about your needs today, and we’ll find a solution.