At its most basic invoice financing is a way for you to borrow money to fund business growth against money owed to you by your customers.

Invoice financing has been around for a while, but it has grown in popularity since the banks became more risk averse in lending to SMEs a decade ago.

Invoice financing is great for improving your cash flow and allowing you to reinvest in operations and growth without having to wait for your customers to pay their invoivces in full.

Let’s have a look at:

• Types of invoice finance
• How it works
• The pros
• The cons
• The costs
• How we can help you

Types of invoice finance

There are two types of invoice finding, invoice factoring and invoice discounting. The difference is in, in part, who takes control of your sales ledger and who is responsible for collecting outstanding payments.

With invoice factoring, a third-party factor (lender) takes control of your sales ledger and collects repayments on your behalf.

With invoice discounting you do this yourself. Discounting is more discrete because your customer deals with you and doesn’t know that you have used the outstanding bill as collateral for funding.

How it works

Nothing changes on a day-to-day basis. You continue your business as normal and invoice your clients/customers as usual. Once you have invoiced your customers you then pass the invoice details to the agreed provider of invoice finance. The provider pays you an agreed percentage (this varies per company), often within only 24 hours.

Depending on whether you have a factoring or discounting agreement in place, you will chase the payment as usual – if that is necessary – or the provider will do that for you. However, unless your agreement is confidential, the fact you are factoring an invoice will be disclosed to the client.

You receive the remainder of the invoice amount once the invoice is paid, minus any agreed service fees.

The pros

Invoice financing is a quick fix for short term cashflow problems. You can normally expect to receive up to 90% of the invoice value within 24 hours of your application being accepted. Funding is secured against your outstanding invoices and no other collateral assets are needed.

Available funding increases as your turnover does so factoring/invoice discounting can be an excellent strategic resource for your business. The value in your invoices act as debt security so invoice financing is a very viable short-term funding solution.

Because invoice finance is ideal for short-term needs you don’t need to tie yourself down to a longer term loan, which represent a financial commitment over a fixed period with hefty penalties for any payment defaults. You need to be sure of your business’ financial stability before committing to a loan, but invoice financing does not have the same lasting effect.

By borrowing against outstanding invoices you have faster access to money that you’re owed. And once the customer pays the invoice, the lender gets their money back, and you get the balance less the interst and admin fees. There is no lasting impact on the business and invoice finance can be accessed more than once; it’s a great short-term, and longer term solution.

The cons

Depending on which type of invoice finance solution you choose you could signal to your customers that you are facing some short-term financial difficulties. You ned to judge for yourself whether this will be an issue for them and if this will cause you any reputational damage.

An invoice factoring company will carry out due diligence prior to taking on the debt.  At the end of the day, they will need to be reassured that they are going to get their money.

Using invoice factoring means your customer is dealing with an outside company which may signal to them you are having issues with cashflow. This may dent their confidence in you and your reputation. There can be a stigma around invoice factoring, even though it is becoming an increasingly popular form of financing and being accepted by clients more and more.

As the fees for invoice finance tend to be calculated as a percentage of your turnover you need to reassure yourself that there is sufficient margin in your products or services to pay for it. And beware hidden fees.

How much does invoice financing cost?

Factoring and discounting are usually very competitively priced and on average are 17% less expensive than taking out an overdraft with your bank.

You will normally be charged a service charge which covers collection and administration costs and is charged as a percentage of your company’s gross turnover at a typical rate of between 0.40% and 2.5%, which will be dependent on your turnover.

In the same way your bank will charge interest on a loan, the discount fee is levied on the money you draw down, averaging between 1% and 3% over base rate. The discount fee will be calculated daily following the advance of the money, which means you will be charged more if your customer takes longer to pay. The base rate should be considered as it could be a high street bank, libor, a minimum amount or any other arbitrary number.

Make sure there are no hidden fees. You could be charged application fees, fees for credit checks and a re-factor fee for each invoice processed  in the UK.

How we can help

We have a panel of more than 50 different companies who will factor and/or discount invoices. Our experts have the knowledge and experience to get the best deal for you.

Asking all the right questions on your behalf we will select the three best companies to introduce you to, based on their quotations. We negotiate the terms downwards for your benefit and see the deal through from inception to completion.

Call us today on 0203 327 0567 or email [email protected] for more advice on invoice finance for your business.