What Is Invoice Finance and How Does It Work?

If you have been exploring your business funding options, you will have likely come across the term ‘invoice financing’ and perhaps wondered what it is exactly? The finance world can seem a little overwhelming for individuals who have not sought funding for their business before and the commercial finance sector is rife with complex terminology.

For those of you who want a better understanding of the common technical concepts used within finance, check out our Jargon Buster Series. But in the meantime, lets dive in head first and learn more about invoice financing so you can establish whether it is the right funding product for your business.

“Invoice Financing: A way for your businesses to borrow money against the amounts due from customers” – Investopedia

Invoice finance is the most sought-after alternate finance product. Why, you might ask. Well, let us explain. This type of business funding is provided against the value of your unpaid invoices and instead of having to wait weeks and sometimes even months to receive money, you can access funds almost immediately. Simply put, invoice finance means you don’t ever have to wait to get paid.

We understand that for most small business owners, the problem is not necessarily the duration of payment terms but whether the invoice is going to be paid on time at all. A large number of businesses do not have enough cash reserves to buy them the added weeks or months that are usually needed to chase unpaid invoices, many of which are used to pay rent, wages and suppliers.

For businesses that find themselves struggling due to large amounts of their money being tied up in unpaid invoices, this type of funding provides the perfect solution. Long, painful waiting times are eliminated, and SMEs are then free to use the funds however they require – whether that is to even out cash flow, pay staff salaries, purchase more stock or even expand.

A company’s debtor book is usually its biggest asset, so utilising it to access funding is a smart business decision that many successful SMEs have made in the past. A report just a few years ago found that UK SMEs were owed over £67 billion in unpaid invoices and that figure will have undoubtedly increased as the percentage of overdue payments has continued to grow year on year.

Payments should not be a waiting game, but unfortunately that seems to be the way things work and there are no signs of this changing any time soon. The vast wait times that suppliers must adhere to put a huge strain on day-to-day operations for many small businesses in the UK and this often hampers any chance of achieving steady growth.

The great thing about invoice financing is that it is far easier than constantly chasing unpaid invoices and trying to make ends meet.So, bypass the difficulty of trying to get by with little to no working capital by raising cash against unpaid invoices. With an invoice finance facility, you can access funds of up to 90% of your outstanding invoice book.

If you think that this type of funding facility is a good fit for your small business, get in touch with our team to be one step closer to accessing your outstanding funds immediately.

How Does Invoice Financing Work?

STEP 1:

Your business does what it does best, which is to provide products or services to its customer base. You then invoice your customers with the peace of mind that late payments will not impact your business as you can access the funds almost straight away through an invoice finance facility.

STEP 2:

You then send copies of each invoice to the finance provider and in return they will pay a percentage of the face value of the invoice directly to you. Our typical facilities are priced from 0.1% to 2% of your turnover but speak with our experts for a bespoke price based on your individual business.

STEP 3:

This step varies depending on the type of invoice finance your lender provides. You can either chase the unpaid invoices yourself (invoice discounting) or you can choose to give your finance provider full responsibility for the sales ledger management process (invoice factoring).

Factoring is a less popular choice amongst small businesses these days as it means that an external party then has direct involvement with its customers. It has its benefits, as it alleviates the biggest issue of the invoice cycle – payment collection. Without the need to perform credit control, businesses are then able to focus on delivering a better service and increasing profit, rather than having to conduct the time-consuming task of constantly chasing unpaid invoices.

But SMEs predominantly choose to access invoice finance in the form of discounting. This means that it is a confidential facility where the business gets to retain control of collections and customers are therefore never aware of the lenders involvement.

The businesses that we work with tend to always opt for invoice discounting, but should there be a need for factoring, there is the option of a full service facility.

STEP 4:

Once your customer settles their invoice, the remainder of that invoice value is then paid back to you by your finance provider, minus the agreed rate for borrowing.

Invoice Financing Sounds Like A Good Idea… What Now?

Once you get in touch with our friendly team, you can book a free consultation to discuss this alternative finance product in more detail. We then set up an initial face-to-face meeting so that we can understand more about your business and how this type of funding could benefit it.

Our consultative, solution driven approach means that we strive to understand the businesses we work with to ensure we can provide a tailor-made funding product that really fits. That might mean we offer your business a combination of products, so Invoice Finance might be just one of the many ways in which we can assist with your business growth.

If you are experiencing cash flow challenges or want to realise your business growth plans, get in touch with our team of Funding Specialists today on 020 7839 9451 or email [email protected].