Are you wondering what exactly invoice finance is? You’re in the right place. If your company sends out regular invoices for work, invoice financing, also known as accounts receivable financing, could be a good option for you. It’s a great way to solve cash flow issues, and it allows you to be paid quickly for finished work.
Opting for invoice finance will also make sure your business has a steady and constant cash flow so it can grow without being hindered by financial problems. But what is invoice financing, and how does it work?
In this guide, our aim is to provide you with all the information you need to know about invoice finance and whether it’s a good option for your business. From the different types of invoice finance methods to their pros and cons, you’ll find all of the essential information right here.
If you’d like to know more about implementing this funding solution into your business, keep reading!
Invoice Finance Explained
So what is invoice finance? Simply put, it’s a way of borrowing funds based on what your clients owe your company. Invoice financing works by using your unpaid invoices to demonstrate money that will be paid to you. This avoids the typical wait for the payment terms and conditions.
These terms can be anything from 2 weeks to 90 days or sometimes longer. Invoice finance is a way of making sure you get the majority of the payment straight away, instead of waiting weeks for your money. This is how invoice finance works:
- Your business provides customers with goods or services, and then you invoice for it
- You submit the invoice details to your provider
- You receive a percentage of the invoice value, typically within two days
- Depending on which type of invoice finance you choose, you’ll either chase the payments yourself, or your provider will collect them on your behalf
- When your customer pays, the rest of the invoice will be paid back to you minus the service fee.
The Different Types Of Invoice Financing
There are two types of invoice finance available for businesses – invoice discounting and invoice factoring. Both of these finance products allow companies to control their finances as much or as little as possible.
Whether you want to control your business’ cash flow yourself or pass that responsibility to an invoice financing provider, both methods can provide the right solution for you. Let’s take a more detailed look at both of these products.
Invoice factoring is the finance product where an invoice factoring provider is involved the most. They provide “credit control” services that make sure your clients pay in a timely manner, which could be a huge help to your business as you won’t have to constantly chase late payments.
Some key points of invoice factoring are:
- Your clients will be aware that you’re using this product
- Your factoring provider can run credit checks on potential new clients for you
- It’s easier for small or new businesses to secure
The other type of finance product is invoice discounting. This is when you perform the credit control for all the payments that are made to your account. It’s the easiest way of invoice financing, and it’s a more hands-on approach to your business. However, because of this, it can be quite time-consuming.
Some key points regarding invoice discounting are:
- It’s usually only available for established businesses that have a higher turnover.
- You’ll still need to do the credit control yourself to make sure your clients pay on time.
Invoice Finance Advantages
As with all funding options, there are pros and cons to invoice finance. Below we’ve outlined some of the advantages to choosing this option.
Quick cash for your business
The main advantage of invoice finance is that it puts you in control of quickly raising money for your company. The cash will be available as soon as the invoice is sent, and it can help your business grow, pay wages, and buy stock.
In the invoice finance industry, these products can be organised in just 1-2 weeks of the initial contact with your provider. Once this arrangement is in place, the invoice finance providers release the funds from the invoice within 24 hours of it being sent to the client.
This means you can quickly respond to any cash-flow shortfalls and raise money for other expenses that your business needs.
When you compare it to other business loan types, invoice finance boasts a very fast turnaround. By sending your unpaid invoices for invoice financing, you’ll never have to wait for the payment period again.
Having to wait up to 90 days or even longer for payments can adversely affect the growth of businesses, especially small to medium enterprises. However, if you don’t offer these standard payment terms, customers may lose trust and go elsewhere.
Invoice finance means businesses can extend the payment terms to their clients without the worry of causing problems with the cash flow.
No need to risk your assets
Because the invoice finance product is an unsecured loan that will take the place of your unpaid invoices, you won’t need to offer physical assets from your business.
For the most part, invoice finance companies don’t require any assets to secure an invoice finance agreement. Most of the time, the invoice itself is enough to secure it. This makes the agreement perfect for companies that have no or very few assets to offer.
Converts credit sales to cash
Invoice financing can also convert credit sales to cash. This means that small to medium businesses can enjoy quick growth and development in a much shorter period of time.
Invoice Finance Drawbacks
We’ve taken you through the pros of invoice finance, and to make sure we provide a well-rounded guide, we’ll now look at the downsides of it. Invoice finance won’t suit every business, and there are some drawbacks you should know about so you can choose the best plan of action for your company.
Some of the main drawbacks to consider are:
Only available for business customers
Unfortunately, invoice financing is only available for commercial invoices. This means your clients have to be other companies, known as business to business or B2B; it can’t be customers from the general public.
Although an invoice finance provider won’t automatically turn you down if your clients don’t meet these criteria, they may not offer you as much financing.
Costs can be higher over the long term
Although invoice finance can be a great short-term solution for business cash flow, there may be longer-term costs that are added on. Take into account any interest rates and processing costs from lenders if you opt for invoice factoring.
Cannot chase payments
Whether your customers are aware of the agreement or not depends on whether you opt for a discounting or invoice factoring arrangement.
If you opt for invoice factoring, keep in mind that chasing any unpaid invoices will be out of your control. The factoring provider will be responsible for collecting overdue invoices, so they’ll be dealing with clients directly. Because of this, customers will know you have an arrangement, and your client relationships could be affected.
On the other hand, invoice discounting means businesses have full responsibility for dealing with payments, so the client won’t know that there’s an agreement in place.
What’s The Difference Between Spot Factoring And Selective Invoice Finance?
As with all loans, invoice finance has its advantages and downsides that you’ll need to consider. If you’re not sure which product would suit your company, or you want a more flexible approach, there is another option that could suit your business well.
Selective invoice finance allows you to pick out certain customer accounts to finance. On the other hand, spot factoring lets you choose specific invoices. Whichever product you choose, you’ll be able to have a more flexible approach and get the funds when you need them.
Selective invoicing is different from discounting and factoring because they’re not full-facility products. This means you can decide which invoices you want to finance and sort the rest as you usually would.
It’s a good option for companies with an accurate idea of how much money they require, but it can be harder to secure than discounting or factoring. Whatever invoice finance facility you opt for, these funding products are an effective way to boost your cash flow.
Is invoice financing a good idea?
Invoice finance is rapidly becoming popular with various companies because of how straightforward it is, and the fact that it offers funding to businesses so they can boost their capital. Waiting weeks or even months to receive payments can put a business under a lot of financial strain.
To prevent any cash flow problems, companies can use an invoice finance provider to secure a percentage of the invoice upfront. The provider will then collect the payment once the invoice or invoices have been paid, with a percentage fee.
But who should consider contacting an invoice finance provider? Small to medium businesses, also known as SMEs, who fit the following criteria should think about an invoice finance agreement:
- Startups, growing or already established businesses
- Are issuing other companies with invoices
- Have a turnover of more than £50,000 per year
What do invoice finance brokers do?
If you have your own business and need to organise finance, you may not have thought about using an invoice finance broker. But if you’re busy and you’re not sure how to choose the best deal, then using the services of a broker may be a good option for you.
You won’t have to pay anything as the lender will pay the broker, and it could save valuable time and money. Brokers are experts in their industry, and their main aim is to find you the best financial products available.
Essentially, they’re matchmakers between businesses and lenders, and they do all the comparison work, so you don’t have to. Invoice finance brokers usually have contacts and relationships with lenders and banks. They also know which financial products will suit your business the best.
This means they are able to negotiate the top deals and rates, which the average business owner may not be able to access as they won’t be in contact with the best product suppliers.
Because some lenders are only accessible through brokers as part of the proceedings, business owners could easily miss out on many opportunities if they don’t go through an intermediary. With many finance options available today, it can be very hard to know which one is best for your business.
Is invoice financing regulated in the UK?
No, the invoice finance industry isn’t regulated by the Financial Conduct Authority (FCA) at the moment. Because of this, you must be careful with whichever provider you choose, being aware that there may be possible hidden fees that might not be evident straight away.
It’s also important to know that if the industry becomes regulated in the future, the costs of factoring would likely increase. FCA regulation typically costs between £1,500 and £50,000 for each business that applies. This means the expenses would probably be passed to the customer.
How much does invoice finance cost?
Although invoice finance is an effective way for companies to handle their own credit control and improve their cash flow, many businesses miss out on it because they believe it will be too expensive. This is a common myth surrounding invoice finance.
Many people believe the fast and flexible funding that they’ll receive will come at a hefty, premium price. But in fact, it’s usually no more expensive than overdrafts or business loans, plus it can be cheaper because it’s a short-term funding solution.
Many people also believe that invoice financing is only available for businesses that are having financial problems. This couldn’t be further from the truth. Invoice financing is a company funding solution that helps businesses to grow in an affordable and straightforward way.
Invoice financing is an excellent solution for new and established businesses, whether you’re preparing for a busy period or you want to secure cash flow so your business can take on new projects.