INVOICE FINANCE ARRANGED BY LENDING MADE SIMPLE
Invoice Finance: Is it the Right Choice for My Business?
Invoice finance is an umbrella term given to a form of lending based on the value of outstanding monies.
Here’s everything you need to know.
Smart business owners are acutely aware of the importance of staying on top of their debtors. In today’s economic climate this has proven challenging for many as cash flow dwindles and many businesses are simply unable to pay their bills. As unfortunate as that is, it’s our bottom line that’s affected.
An article on the challenges faced by small businesses in the UK says, “Our research shows that of the 50,000 businesses that fail each year due cash flow issues some 65 per cent of these blame access to funding. Quite often the working capital they need is tied up beyond their reach with late paying customers.”
If you have outstanding invoices which are negatively impacting your cash flow and the health of your business, then you may be interested in a business loan in the form of invoice finance.
What is Invoice Finance (IF)?
Invoice finance is an umbrella term given to a form of lending based on the value of outstanding monies. There are several types of invoice-based lending open to businesses and can be an efficient way of unlocking cash which is tied up in the debtor’s column. These are invoice discounting, invoice factoring and selective invoice discounting.
We all know the frustration of sitting with 60- or 90-day outstanding invoices and how these affect our ability to carry our own financial loads. Sadly, so many businesses are under an enormous amount of pressure as they try to stabilise after the hangover of COVID-19 - and while they’re doing their best to catch up, it may not be soon enough for you.
What are some of the benefits of Invoice Finance?
You are able to quickly free up money to improve your cash flow or business expansion. Smaller businesses or those who invoice
fewer customers with larger sums will certainly appreciate the immediate nature of invoice finance as it relates to their cash flow.
Generally speaking, invoice finance can be made available faster than traditional finance options.
Being liquid allows you to capitalise on special offers or other growth opportunities instead of being hamstrung by
cash flow hiccups.
In some industries, the ability to offer payment terms which stretch out over 60- or 90-days places businesses in a stronger
position. Think about it, if your competitor can offer a 60-day payment option but you can’t, you’re going to lose that business.
With this being an (understandable) issue for small or younger businesses, the option to remove this hurdle by making use of
invoice finance is a major benefit.
IF provides access to the value of your invoices before they are paid.
For companies experiencing cash flow issues, having the ability to pay employees or suppliers or reinvest in operations and growth
without being forced to wait for customers to settle their outstanding amounts is a big plus. You can also benefit from early
payment discounts with your own suppliers as a result of improved cash flow.
Available funding grows with the company turnover.
As the value of your invoices grows, so does the funding that you can access. Compared to, for example, a bank overdraft, this makes
invoice finance an attractive and flexible option.
No long-term responsibilities.
This is not a long-term debt which you need to tie around your neck for a short-term solution. You have the option to choose which
invoices you will put up for finance and pay only for those.
No security requirements.
Many lenders will require some form of security before agreeing to a loan – and with good reason. However, the only security
required for invoice finance is the invoice itself.
You are not acquiring more debt.
Invoice finance is not debt, and it’s not a loan either – despite being available from a financial lender. This means that the money you
are borrowing against is what you have already invoiced, but the amount you are borrowing is not logged as a liability.
There are a lot of positives here, you must agree. However, no perfect finance options exist, and like
any other business loan, invoice finance has its drawbacks.
Disadvantages of invoice finance
Invoice finance is tailored to businesses with cash flow issues due to late-paying customers. If your customers are well-behaved and pay on time, then you may benefit from cheaper or more flexible business loan options. A frank conversation with your business loan consultant will help you to find the best choice for you. As a short-term loan, you will find that invoice finance comes at a higher cost than a bank loan.
Businesses who don’t have a track record of paying clients and reasonable money management may not qualify for invoice finance. In some cases, if they do it will be at increased rates.
It can happen that your business can be locked in a cycle of debt if the IF is not managed properly.
We’d like to run through the basics of the various invoice finance options and unpack the various features of these business loans.
How does invoice discounting work?
Invoice discounting works as follows:
You invoice your customer as usual for products or services
You send the invoice details to the lender
The lender then pays an agreed percentage of the face value of the invoice to you
You continue to monitor the invoice for payment and when received, the remainder of the invoice is paid you then repay your loan
We know that the money is coming, but we just don’t know when. Making use of invoice discounting may take a week or so to set up, but it can grant you up to 95 percent of the value of your invoices within 24 hours of their being issued.
Key advantage of invoice discounting
Many of the clients that choose invoice discounting do so as it helps to maintain the reputation and the liquidity of their business.
Invoice discounting, as opposed to invoice factoring (more information on this below), allows you to continue to manage the relationship with your clients without them knowing that you are making use of financial assistance.
What is Invoice Factoring?
Here’s how invoice factoring works:
You invoice your customer as usual
You then pass the invoice details to the provider
The lender then pays the agreed percentage of the invoice to your business
The lender takes over control of the invoice and will follow up until payment is made
In essence, the lender will assess the risk attached to the debt owed and will ‘buy’ the value of your outstanding invoices.
Advantages of invoice factoring
The key difference between invoice discounting and invoice factoring is this: if you, like so many people, dislike chasing payments and following up on defaulters, then invoice factoring may be the ideal solution for you.
You simply hand over the invoices and walk away.
However, it’s worth knowing what the downsides are in this instance.
Disadvantages of invoice factoring
When you choose invoice factoring you are handing over a level of control to a finance company whose role is to recoup outstanding monies. This may relieve you of the drudge of debt collection, but it may also harm your relationship with the client if the lending company you have chosen is – shall we say – a little forthright.
With you handing over the reins to factoring providers, your customers will know immediately that an invoice finance facility is in place and will likely be able to guess at the reason for it. Do you want your customers to know that you are experiencing cash-flow issues? That’s a question only you can answer, as situations like this may negatively impact customer confidence.
What about selective invoice discounting?
Invoice finance is nothing if not adaptable. Selective invoice discounting is self-explanatory, with clients choosing to pass only selected over invoices to a lender to loan against.
The pros and cons of selective invoice discounting remain the same as discounting mentioned above but just allows for a little more flexibility.
Do I Qualify for Invoice Finance?
You’ll be thrilled to hear that most businesses can qualify for invoice finance.
If you don’t have any major financial issues and you have a solid base of customers with good credit records, then you’re likely to qualify. This is a welcome relief for start-ups who may not have the financial history to qualify for more traditional business loan options.
Another requirement is that you need to be operating in a B2B space. Invoice finance is not available to you if you are selling to the general public.
What Should I Do Now?
Are you affected by late payments and the knock-on effect of these? You’re not alone. B2B sales, in particular, have a way of absorbing your cash and making it difficult to fulfil large orders.
A report from Finance Monthly on the state of late payments in the UK says, “Late payment practices harm business cash flow, hampers investment and, in extreme cases, can risk business solvency. Separate research we’ve conducted highlighted that 87% of businesses are prevented from taking on more orders because of the cashflow constraint owing to late payments. Overall it seems who you are doing business with and where they are based is important to know for a small business if they need to forecast cashflow.”
Sadly, many smaller businesses don’t have the option to simply hand over their late payers to a collection company, or they risk losing them altogether.
Undoubtedly, this is a headache for many!
Do you need assistance in freeing up your cash trapped in unpaid invoices?
The team here at Lending Made Simple have their fingers firmly on the pulse of the financial possibilities here in the UK and are well-positioned to guide you in making the best decision for your business.