Invoicing Financing For Small Businesses

Invoice financing is a type of business finance that allows you to access funding by using unpaid invoices as security. This means you can get paid for your goods or services sooner rather than waiting for your customers to pay you in full.

Invoice finance can be used for various business needs, including increasing working capital, covering short-term cash flow gaps and freeing up cash to invest in new opportunities. It also allows businesses to scale their operations and manage seasonal fluctuations in demand. Invoice finance is an alternative to traditional bank loans.

When considering invoice financing, it’s important to understand how the process works. An invoice finance provider will advance you up to 80% of the value of unpaid invoices minus a small fee based on the amount advanced. You can then repay these funds when your customers make payment in full.

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Types of Invoice Finance

There are two main types of invoice finance:

Invoice discounting: With invoice discounting, you sell your unpaid invoices to a third party. The third party will then pay you a percentage of the value of your invoices upfront, usually up to 90%. You will still need to complete your own credit control.
Invoice factoring: With invoice factoring, the factor takes over the management of your accounts receivable. This means they will collect payments from your customers on your behalf and be responsible for chasing late payments. In return for this service, the factor typically charges you a fee, usually a percentage of the invoice value.

Advantages of Invoicing Finance

Invoice finance can be a helpful way to improve your cash flow and access funding when you need it. However, it is important to note that it is a form of debt finance, so you must ensure you can afford the repayments.

Here are some of the benefits of invoice finance:

Improved cash flow: Invoice finance can help you improve your cash flow by giving you access to funds sooner. This can be helpful if you struggle to meet your short-term financial obligations.
Access to funding: Invoice finance can be an excellent way to access funding if you do not have the collateral required for a traditional loan.
Flexibility: Invoice finance can be a flexible option, as you can choose the terms of the agreement that suit you best.
Risk reduction: Invoice finance can help to reduce your risk of bad debts by transferring the risk of non-payment to the factor.

Disadvantages of Invoice Financing

Here are some of the drawbacks of invoice finance:

Cost: Invoice finance is a form of debt finance, so you will need to ensure you can afford the repayments.
Loss of control: With invoice factoring, you will lose control of your accounts receivable. This means you will no longer be responsible for collecting customer payments.
Reporting requirements: You may be required to provide the factor with regular financial reports.

How Invoice Financing Works

Invoice finance is an excellent way for businesses to access funding by using unpaid invoices as collateral. Here is a step-by-step guide to how invoice financing works:

The first step is to choose an invoice finance provider – this could be a bank, online lender, or other finance company. It’s important to compare providers to ensure you get the best deal.
Once you have chosen a provider, you must apply and provide invoices you wish to finance. The provider will then assess your application and decide whether or not they can offer you financing.
If your application is approved, you will receive an advance of up to 90% of the value of the invoices; this amount will depend on their own risk criteria. This money can be used for any purpose, such as paying suppliers or investing in new equipment.
You collect payments from your customers as usual.
Finally, you will need to repay the advance to the invoice finance provider when your customers make payment in full, less the fee.

Invoice finance can be an excellent way for businesses to quickly improve their cash flow and access funds. However, it is important to remember that it is a form of debt finance, and you should ensure that you can afford the repayments before taking on this type of financing.

How Invoice Factoring Works

Invoice factoring is similar to invoice financing. However, the process differs in one key aspect – you no longer need to manage your accounts receivable. The factor will take over this responsibility and handle all customer payments and collections on your behalf. Factoring allows you to pass on the headache of credit control and concentrate on running your business.

Here’s a step-by-step guide to how invoice factoring works:

As with invoice financing, the first step is to choose an invoice factor and submit your application. The factor will then assess the application and decide whether or not they can provide you with factoring.
If approved, the factor buys your invoices.
The factor will then take over responsibility for your accounts receivable, managing customer payments and collections on your behalf.

One of the significant differences is that the customer will know you are using an invoice factoring company.

How to Find an Invoice Finance Provider

When looking for an invoice finance company, shopping around and comparing different offerings is important. Here are some tips for finding the right provider:

Look for an invoice finance company with experience in your industry – they will be better able to understand your business needs and offer the best financing solution.
Check out their customer service – choosing a provider that can answer any questions you may have quickly and efficiently is important.
Consider the fees and costs involved – make sure you know what you are signing up for before committing to anything.
Ask for referrals – speak to other businesses or family/friends who have used invoice finance and get their opinion on the provider they used.
Read reviews – reading online reviews can give you an idea of what to expect from a particular provider.

Invoice finance can be an excellent way for businesses to access working capital quickly and easily. However, it’s important to research before committing to any financing agreement.

Take the time to compare providers, read up on their terms and conditions and ask questions to make the right choice for your business.

If you want to compare invoice finance, factoring and asset finance, Close Brothers is a good place to start.

Invoice Finance Example

Let’s look at an example of how invoice finance works in practice.

For simplicity, let’s assume a small business has one customer who owes them 10,000 for services provided. The company wants to access the money owed quickly and turns to invoice finance.

The first step is to choose a provider and submit the application form. Assuming everything is approved, the provider will then advance up to 90% of the value of the invoice – in this case, 9,000. The business can use this money immediately for any purpose they wish.

Once their customer pays the total amount due (less any fees), the remaining balance – in this case, the 1,000 – less any fees will be paid back to the invoice finance provider.

Invoice Finance Alternatives for Unpaid Invoices

If you are looking for an invoice finance facility, it is worth starting by looking at alternatives that might be cheaper.

Review the Business Finance

Always start by reviewing the business finances and run a cash flow report; this may show that the cash shortfall might only be temporary and that, in the short term, you might cover it. Look at the expenses and see if anything can be reduced or delayed. Using an invoice finance company will add additional expenses, which are better avoided.

Complete your own Credit Control

Overall, invoice finance can be a valuable tool for small businesses that need to improve their cash flow or access funding. However, weighing the benefits and drawbacks before deciding if it is the right option for you is important.

The first thing to consider is improving your credit control and collecting money from your sales ledger faster. This will include looking at outstanding invoices, making telephone calls, using accounting software to chase payments regularly, and sending out sales ledger statements.

Use Bookkeeping Services

Some bookkeepers provide services to help small businesses stay on top of their accounts and credit control services. This can include sending statements, chasing payments, and setting up automated systems to remind customers about unpaid invoices on the sales ledger.

Take Payments Up Front

If you can take payment upfront, this will reduce the risk of not getting paid at all. You could also set up a deposit system or require customers to pay 50% upfront before delivering goods or services.

Look at Other Financing Options

If invoice finance is not an option for you, other financing solutions, such as business bank loans, overdrafts, crowdfunding and peer-to-peer lending, may be better suited. You will need up-to-date financial statements of the balance sheet and Profit & Loss to apply for financing.

Make a Court Claim

As a last resort, you can make a court claim if customers don’t pay their invoices. This is particularly useful if a contract specifies when payment should be made and what will happen if it isn’t.

You can do this yourself and pay a court fee; you do not need a solicitor. You can also charge interest on the outstanding amount.

Asset Finance

Asset finance is another option for businesses that need to access funds quickly. This type of finance allows companies to take out loans or leases on assets such as stock, plant and machinery, computers and vehicles. The asset can then be used until repayment has been made in full.

FAQ on Invoice Financing

Is invoice finance regulated in the UK?

No, at the moment, invoice financing in the UK is not regulated by the Financial Conduct Authority (FCA). Still, there is an industry-wide code of conduct called the standard framework by UK Finance to ensure a fair service.

Can I use Invoice Finance with Bad Credit?

It’s possible to get approved for invoice finance if you have bad credit, as the main factor in any financial decision is the creditworthiness of your customers rather than your own. However, getting approved may be more difficult, and you may have to pay a higher interest rate.

How long will I have to wait for the funds?

An invoice financing company can release funds in as little as 24 hours but may take longer.

Am I tied into a long contract?

This will depend on your invoice finance facility, but many providers offer short-term contracts with no minimum length. It is also possible to get finance on a single large invoice.

Invoice Financing Conclusion

Invoice finance funding can be an excellent way for businesses to access working capital quickly and easily, but it is important to research before committing.

Take the time to compare invoice finance providers, read up on their terms and conditions and ask questions to make the right choice for your business.

Alternatives such as improving credit control or taking payments upfront may also be worth considering if invoice finance isn’t an option. Additionally, don’t forget about other financing options like bank loans, overdrafts, crowdfunding or peer-to-peer lending – these could provide a more suitable solution depending on your circumstances.

Ultimately, choosing the best invoice finance provider will depend on understanding your needs and potential customers’ needs to ensure you get the most out of any agreement.