Introduction
Turnover is vanity, profit is sanity and cashflow is reality! Businesses often think that they are doing well when their turnover grows quickly. Unless this is controlled, they can often be busy fools or even worse, haemorrhaging cash. Even businesses that are making profits may, due to their investment profile or long product lead times have negative cashflow. If you run out of cash and you have bills to pay, then this is a fast route to the insolvency practitioner.
Issues that can blow a business off course include:
Faster than expected growth maxing out their working capital.
Insufficient margins.
Slow paying customers.
Bad and doubtful debts.
Heavy investment programmes.
Unexpected costs such as increased tax bills.
Long lead times from sourcing materials to selling product.
Transport delays.
Invoice Finance can be a solution for businesses struggling with the cashflow implication resulting from any of the above situations.
Currently over 35,000 businesses are using invoice finance to raise over £300 billion of working capital. This finance is sourced from over 120 providers. There are many variations amongst these providers in terms of facilities offered, pricing, terms and service.
What is Invoice Finance?
Invoice finance is when the lender uses a business’s unpaid invoices as collateral for funding, giving quick access to typically 85% of the value of those invoices.
There are a number of different types of facility. The variations usually are linked to the following products:
Invoice Discounting – A bulk facility which is usually confidential.
Factoring – Usually disclosed with the lender providing a sales ledger control function for their client
Spot – where the lender provides funding against individual accounts or invoices as required by the client and not the whole sales ledger.
Once a facility is set up funding is made available to clients as soon as the invoices are notified to the lender (subject to spot checks).
How Invoice Finance Improves Cash Flow
Quick Access to Cash:
Funding typically ranges from 70% to 85% if the gross invoice value including VAT.
If additional security is available, it is possible to go higher. It may also be combined with the Government Growth Scheme to provide an additional loan.
Some industries are less attractive to lenders but can still source a facility. Construction is one of these due to the contractual nature of the debt. Funding for construction may range from 30% to 60% depending on the risk profile.
Most funders now benefit from modern systems which can ease the upload of invoices on to their system. While in the old days you may have had a 24 hour or more wait, it is now possible to receive funds the same day or in fact within an hour or so depending on the bank.
Smoothens Cash Flow Volatility:
The facility provides a pot of available funding against the outstanding sales ledger. The client can draw against the facility when they like. The ideal situation is one where the client plans their cashflow and draws against it when they need the funds.
Avoid Delayed Payments:
If a facility is taken which includes a sales ledger control function, then this professional approach to collecting money will ensure that customers pay on time. It also quickly identifies problem invoices and possible bad payers to ensure that action is taken at an early stage to control or reduce exposure to problem accounts. If credit protection is taken with the facility, then where the invoices are covered then the client is paid for the bulk of any loss.
Maintain Business Growth:
In the past overtrading was seen by bankers as a considerable risk to the viability of a business. While it is still a risk, with invoice finance your facility increases with your increased sales allowing the business to grow at a faster rate than would otherwise be possible.
Key Benefits of Invoice Financing
Improved Cash Flow Management: Direct impact on day-to-day operations, ensuring you have better control of cash.
No Need for Additional Debt: Unlike loans, invoice finance doesn’t add to your business’s debt burden. The facility is a revolving credit facility based on the security of the sales ledger. There is no repayment period and costs are paid within the facility.
Helps with Expansion: Access to funds means more opportunities to invest in expansion, marketing, or new projects.
Potential Risks to Consider
Costs: As for all services, costs are payable for the operation of the facility. These are split into service fees which pay for the operation of the facility, other fees which cover extras such as same day payments, facility changes or requests for other exceptional services and discount (calculated in the same way as interest) which is based on the amount of funding taken.
Reliance on Clients: Invoice financing is dependent on the quality and reliability of your clients. If your business is highly seasonal, you are reliant on one or a few customers or if turnover is in decline, your facility could either be highly restricted or rapidly decrease at an unexpected and inconvenient time.
Multiple Suppliers: With over 120 suppliers in the market, it is a major task to assess and compare the suppliers and options. Without getting the right advise you could end up with a contract which does not perform well for your business.
Is Invoice Finance Right for Your Business?
We can help you to decide whether this product is appropriate for your business. Our directors have a lifetimes experience working in the industry at senior levels and will look for the correct solution for your business amongst the extensive list of suppliers,
Conclusion
Invoice finance and its derivatives continue to be an important solution for business’ raising finance. If you are a business and you sell on credit terms to business customers, then your business could use this product. With any form of finance, you should consider how you are to use it and how it can be made to work for you. If used properly it can help your business grow successfully and profitably.
With so many options available and a raft of suppliers across the market, it is sensible to appoint an advisor to guide you. If you sign up for the wrong contract, then you could be stuck with it for over a year. If it is not working for you then this could have a detrimental affect on your business. In most case an advisor will not charge anything for their service with their fees being paid by the lender. Furthermore, an advisor will try to get you the best deal which is likely to be better than going direct in terms of costs, terms and security.
Don’t worry, we’re here to help. If you have any questions, are interested in Invoice Finance or would simply like to understand if it’s a possibility for your business, then get in touch and we’ll be more than happy to help.

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