You may need finance to grow your business – to take on staff, upgrade equipment, develop new products or run marketing campaigns.
Use our blog series to explore options for financing growth, and to understand the advantages and disadvantages of each method.
Part 4: Invoice Finance
Invoice Finance is a way to unleash cash quickly, advanced against the collateral value of your unpaid invoices (accounts receivable).
Rather than wait 30 – 120 days for your customers to pay, you receive up to 90% of the money within 48 hours of raising the eligible invoice, and the rest when the customer pays, less fees and interest.
The Invoice Finance provider (Factor) decides which invoices they advance against, and up to what percentages.
For further information see https://www.finder.com/uk/invoice-financing
There are two types of Invoice Finance:
The financier buys the unpaid invoices and collects the debts from customers (more expensive).
The financier lends money against invoices, which remain owned by the business, who collect the debts (less expensive and confidential from customers).
Advantages of Invoice Finance
- Instant payment against sales invoices
- Improved cashflow
- Easier and quicker to obtain than business loans
- Financier lends against strength of the invoices, not the credit score of business being financed
- Typically more and cheaper funds than with a business overdraft
- Free up time from credit control
- Finance expands and contracts with a business’ sales ledger
- Less expensive than equity investors
- Professional debt collection can speed up customer payment times
Disadvantages of Invoice Finance
- More expensive than bank loans
- May be 12 – 24 month tie-in
- Could impact additional borrowing requests
- Business may only be offered factoring not invoice discounting
- Factors may collect all invoices
- Credit insurance may be required
- Third party invoice collection may affect customer relationships
- Inflexible if financier pre-arranges number of invoices bought
- Factors may limit concentration of invoices paid in some industries
Factors may take back their money or add fees if customers don’t pay
A company with powerful customers requiring long credit terms, or a business with high stock costs for good orders may find Invoice Finance useful.
Invoice finance companies usually fund business-to-business product suppliers. If you provide business-to-consumer ongoing services you are unlikely to be eligible.
New and established businesses can be eligible, but some financiers have a minimum trading time of 6 – 12 months.
If you export and invoices are paid by overseas clients, some companies will not assist or add conditions.
Some providers have specialist solutions for particular industries, such as recruitment, manufacturing, printing and transport.
Invoice finance costs differ according to invoice value, business size, and perceived risk.
Fees vary – there is often a service charge, a discounting fee, interest, and additional fees for credit protection, or early contract termination.
For further information see https://www.google.com/amp/s/www.businessexpert.co.uk/invoice-finance/factoring/amp/
Both these methods allow businesses control of their cash flow, without the traditional obligations of discounting the entire debtor ledger and lengthy lock-in periods.
Invoice Trading (peer-to-peer lending)
A newer version of invoice finance uses an online platform to sell invoices to individuals or groups.
You decide which invoices to sell, they are quickly verified and sold to multiple investors.
Because investors are global, invoices to overseas customers from export can be funded.
Also known as single invoice factoring or selective invoice discounting.
This allows businesses to sell one large invoice to fund cashflow.
It can be significantly more expensive than traditional factoring, and can take time to set up with a new Factor.
For further information see https://www.marketinvoice.com/business-finance/what-is-invoice-trading.
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