Businesses rarely fail through lack of ideas, one of the main reasons that businesses, particularly SMEs, fail is due to lack of cash. All too often businesses foot the metaphorical bill of growth restriction caused by the time between invoicing for services/goods and payment actually being received. Cash flow would be so much better if all clients paid what they owed straight away and invoice finance is a way of achieving the same net result!
What is invoice finance?
Simply put, invoice finance is a way of generating cash from the business’ unpaid invoices enabling you too:
- Buy raw materials
- Take on a new salesperson
- Implement a marketing campaign
- Sleep at night!
The process is simple:
- Your business and aged debtors will be assessed and a facility size will be set. Up to 90% of invoices raised monthly will be able to be drawn down
- As invoices are raised you will be able to draw down up to the agreed limit to use for cashflow purposes
- Once the invoices are paid, the fees to the finance company will be deducted and the balance of the invoice released
There are 2 types of invoice finance:
| Invoice Factoring | Invoice Discounting |
| Clients aware of facility | Clients generally unaware of facility |
| Credit control is taken on by finance company | Credit control is dealt with by client |
The type of invoice finance that is most suitable will depend on a number of factors, including your priorities, so it’s vital that you speak to a finance company that can discuss all the options available to you.
Bad debt protection is also an additional option, giving you peace of mind should any of your clients cease to trade.
The two main fees for invoice finance are as follows:
Service Fee = A fee for covering the service of managing the process and collecting the payment. This is calculated as a percentage of the value of the invoice when it is notified.
Discount Fee = A usage fee, charged at a percentage over bank base rate, calculated daily and charged monthly from the borrowing balance outstanding.
The actual costs will depend on the business’ individual circumstances, but we are more than happy to provide you with illustrations.
One of the benefits of invoice finance over other working capital facilities is that the finance is ‘secured’ on the debtor book, meaning property isn’t required as collateral. The invoice company will take a debenture over the company though and directors’ guarantees are generally required for around 10% of the facility size.
How do you know if invoice finance is the right product for your business?
If any of the below apply, then there are probably more appropriate facilities for your working capital requirements:
- All your clients pay immediately on receipt of invoice
- Your business is a cash business
- The majority of your clients are domestic
Otherwise invoice finance is a fantastic way to release cash that would otherwise be tied up, prohibiting your business from growing as quickly as it could.
To get an indication of the options available to you, we would need to know your annual turnover, as well as the number of commercial invoices that are raised per month. We can then explore the market and discuss our findings with you!