If you’re a business that offers services on payment terms, from time to time you likely have money that’s locked up in unpaid invoices. When dealing with this situation, one of the options you can turn to is confidential invoice finance. It lets you improve your cash flow, so you can use it to reinvest in your business and help it grow.
As with all financial products, the most important thing is that you understand it and what it would entail for your business before making any decisions. With that in mind, we’ve written this explanatory guide to give you clarity on everything you need to know about confidential invoice finance.
Confidential invoice finance is a way of borrowing money against your unpaid invoices. It allows you to get funding in advance while you wait for your customers to pay you. Additionally, it lets you do this without your customers becoming aware that you’re securing finance against their debt – a service aspect you may prefer for several reasons.
Broadly speaking, confidential invoice finance means any form of invoice finance that your customers won’t find out about. As such, it’s a category that encompasses multiple types of invoice finance, each using different ways of preserving confidentiality and coming with its own pros and cons.
However, they all retain the distinguishing features of invoice finance. You use unpaid invoices from your customers to take out loans from a third-party finance provider.
There are three main phases of confidential invoice finance:
· Invoice raising: After completing your work as per usual, you raise an invoice with your customer and send a copy to your finance provider.
· Initial funding: The provider processes your request and advances you a percentage of the invoice’s value, usually 70-85%.
· Final instalment: After your customer pays the invoice, the provider sends you the balance minus their pre-arranged fee.
The processes of confidential invoice finance are slightly different depending on which kind you choose. There are three types: invoice discounting, confidential invoice factoring and confidential CHOCs (customer handles own collections).
· Invoice discounting: This is a bulk invoice service, usually reserved for large and established businesses with strong credit control processes. You handle your own invoice collection and your customers pay you without ever coming into contact with your finance provider.
· Confidential invoice factoring: As with regular invoice factoring, your finance provider takes over credit control and chases up unpaid invoices from your customer. However, they now act as a member of your business when contacting customers for invoice payment, preserving confidentiality.
· Confidential CHOCs: This type of funding also allows you to keep control of credit, but your customers pay their outstanding invoices to your finance provider using a trust account in your name. This option is better suited to early-stage businesses that don’t qualify for invoice discounting or want to advance lower-value invoices.
There isn’t any standard price for confidential invoice finance. The costs involved will vary depending on which exact form you choose, as well as your agreement with the finance provider. However, there are some aspects of fee structuring that are shared across invoice finance.
The interest rates are also called the factoring or discounting rates, depending on which form of invoice finance you’re using. They’re usually set around 1.5-5% per year above the Bank of England base rate.
This is simply the time it takes for your customer to pay their invoice. Since providers charge interest rates over time, a longer period means a greater cost for you.
Finance providers also charge a fee for the service, usually calculated as a percentage of your business’ annual turnover.
For invoice discounting and confidential CHOCs, you do the work of collecting unpaid invoices, whereas with confidential invoice factoring this is handled by the finance provider. For this reason, the service fee for confidential invoice factoring is typically higher than for the other two types of confidential invoice finance.
· Boost cash flow: Invoice finance lets you increase your working capital by using short-term loans that bridge the gap between completing services and waiting for payment.
· Maintain customer relationships: Your customers’ opinions of your business won’t be influenced by this form of funding, since they won’t find out you’re using it.
Does this sound like something that would benefit your business? At Nucleus, we specialise in all things commercial finance – including invoice finance. Get in touch with a member of our friendly team to discuss your needs and see if confidential invoice finance is the right option for you.
· High interest: The interest rates for invoice finance are higher than the Bank of England base rate, which may also be higher than for other financial products. Be sure to compare rates across all your options before making any decisions.
· Invoice limitations: Many finance providers require your invoices to be from creditworthy customers. This is because the biggest risk for them is that your customer will not pay. If your main customer base is small businesses, you might not qualify for confidential invoice finance.
Like all financial products, confidential invoice finance has its downsides. If it seems like it isn’t the right option for your business, why not explore some of the other types of business funding that are available?
If you operate a UK-registered business and issue invoices to customers for your services, you could qualify for confidential invoice finance. This includes all types of small businesses, including start-ups and sole traders.
The qualifying criteria differ for each type of confidential invoice finance. Moreover, each finance provider has its own rules of operation. Nonetheless, there are some things that you can expect.
Invoice discounting is most suitable for large businesses with at least a year’s trading history, robust credit control processes and creditworthy customers with a history of paying on time. Additionally, many discounting companies require you to meet a high minimum annual turnover.
The eligibility for confidential invoice factoring is relatively more open. Even so, some factoring companies may still require that your business meets a minimum annual turnover. The factoring company is also likely to consider the quality and trustworthiness of your customers, including their credit scores.
Confidential CHOCs is the form of confidential invoice finance that has the least strict qualifying requirements. If your business has under a year’s trading history but you have your own invoice-chasing systems in place, this is likely your best chance of securing funding.
Hopefully, you now have a better understanding of the different types of confidential invoice finance, what they mean for your business and their pros and cons. Having clarity on these points is essential if you want to secure funding that properly solves the problems your business is experiencing.
It’s often easier to get this clarity by speaking to highly trained experts, rather than trying to work things out on your own. Nucleus' specialists have a wealth of experience in commercial finance that we use to find the right solution for your business. If you’d like to find out more about confidential invoice finance or any other type of funding, please don’t hesitate to get in touch.
4 August, 2022