Find out more about invoice finance and how it can be used to free up funds to help your small business grow and prosper.
Invoice Finance offers small and medium businesses a short term solution to a slow cash flow situation. Many businesses face circumstances in which they need funds quickly, and if there is no cash in the bank, they will need to find other solutions and an alternative form of finance.
If you are in business, you already know that cash flow can be one of the most difficult aspects to manage. Your business may be seasonal and therefore subject to substantial increases in turnover at different times of the year. You may find that you have to raise money quickly to deal with repairs, or to finance items essential to your business going forward. You could be affected by changes in policy regarding invoices and when they are paid to suppliers and contractors. Many major companies no longer make payments on a monthly basis, choosing instead to manage their accounts quarterly.
Invoice Finance can help resolve matters in the short term and to get your business back on an even keel.
Invoice Finance Solutions – Use Your Invoices as Business Assets
The principle is a simple one. Invoice Finance is an advance on a promised payment.
When you have undertaken work or provided a service to someone you bill them. The bill or ‘invoice’ is an asset which demonstrates that the amounts stated are due to you in the form of a payment.
In retail there is a simple and immediate transaction and exchange of goods between the customer and the supplier which can be made in cash or as a card payment. For other businesses the process is a little more complex. Once the work is completed and the transaction has finished, the next step is to raise an invoice against the work done. The invoice usually accompanies a ‘purchase order’ which acts as proof that the company had requested the work and had agreed the price with you (providing double security for the lender).
Using Invoice Finance Companies in the UK
Our specialist advisors can offer guidance as to how the process works within the UK market. They have expertise and can work with you to make sure that the solution offered is appropriate for your circumstances.
Any invoice can be viewed as a business asset – it is a ‘promise’ of future payment and proof of money owed. Like any other asset it has value and it is possible to ‘borrow’ from specialist lenders against its worth. Invoice Finance Companies will advance between 70% and 90% of the value of the invoice, with the balance (less fees) transferred once the invoice has been paid. Costs and fees will vary – factor rates are typically between 0.5% and 5% of the value of the invoice. You may also find additional fees for set up and ‘maintaining’ your invoice ledger.
Types of Invoice Finance Services
Factoring – Factoring means that you effectively ‘sell’ your invoices to a third party company at a discount. The Factoring Company advances cash against the invoices and take charge of chasing your debts with all the businesses who owe you money. The Factoring Company takes a percentage of your invoices, acting as a management company for all your transactions. There may also be additional management costs on top, so it is important to check the small print.
The whole process is transparent, with all parties (including your customers) knowing that the invoice has been factored to a third party. Potentially this could affect your reputation with your customer.
Invoice Discounting – Companies choose this option because of the confidentiality involved in the process. In this case the money is advanced to you, but it remains your responsibility to chase the payments and to pay the lending fees to the Invoice Finance Company once your customers have paid you what they owe.
Your customers are unaware that you are using the service, so they are not alerted to any ‘cash-flow’ problems that you may have.
Spot Factoring – Spot factoring is a cash advanced applied to a single invoice from a customer. It is an easy and quick to solution to help resolve a very short term cash-flow problem or where your customer may be a little late in their payment. In this case you can ‘off-load’ specific invoices that may be causing problems for your business while you await settlement of the account.
As with any other form of finance there are risks involved with Invoice Finance. You should always check the terms and conditions of any contract before you sign it. If you intend use your invoices to raise capital to your company’s cash-flow moving, make sure you are on top of your accounts at all times and keep detailed records of all transactions and payments.