What is invoice Finance? This type of financial product can help with short-term cash shortages. These can be lethal for many businesses, but invoice finance could be a cost efficient answer. What is the most dangerous threat to your business? Is it the risk of a global recession? That demand for your services might dry up or that a new competitor will steal your customers?
The chances are it’s the rather more mundane issue of whether your clients will pay on time. If people fail to pay up you can find yourself struggling to make ends meet, which is why some businesses choose invoice finance.
Why use Invoice Finance?
According to the Federation of Small Businesses, as many as 50,000 business failures could have been avoided every year if their clients paid on time. If you reach a moment where you can’t pay your staff or pay important bills such as tax liabilities you can find yourself being declared insolvent – even if business is good and you are owed substantial sums of money.
There are a number of financial options available to businesses to help them get over these short-term hurdles and one of the most popular is invoice finance. This can also be known as invoice factoring or asset-based finance and involves selling your invoice for a discounted fee to a third party provider, such as a bank or an independent finance provider.
Business in some sectors like healthcare suffer from their customers paying on time. These are government backed such as social services and the NHS. Slow paying customers are just not in the private sector.
Invoice Financing Companies how do they work?
Invoice Financing companies like : HSBC Invoice Finance work by both parties entering into an agreement whereby they will manage your sales ledger and credit control on an ongoing basis for a fixed period of time. This will normally be the fixed term of the contract which will normally be 24 months.
The finance company will advance you a proportion of those funds – often around 75%. When the client finally pays, the company provides you with the remaining balance minus their fees. This has a number of advantages. Firstly, this is a way to unlock some of those funds tied up in your invoices. This means you can overcome any short-term cashflow crisis and keep your business running.
For example, it means you might be able to meet payroll and continue paying all your own suppliers to keep everyone content with the business. This can save you money in the long run through things such as late payment fees or a less favourable payment terms with your suppliers.
It is generally a cheaper and more affordable form of finance than other options such as a bank loan. Because you are selling your existing invoices, you are less reliant on a good credit score. There will also be no impact on your credit rating because this is not a loan.
It also removes some of the burden of chasing late payers. Aside from the financial worries of late invoices, this can involve a lot of extra work and administration. Time spent chasing these invoices takes you and your staff away from more valuable operations such as driving more sales or shaping your business strategies. For small and limited size businesses, this can act as a constant anchor around your leg, preventing you from moving forwards.
By using invoice finance companies, you can have someone else take on all this work. They will shoulder the burden of chasing invoices, and ensuring you get paid on time. Because this is their sole focus, they will also be somewhat more effective in ensuring all those delinquent payers are chased down as quickly as possible.
Last, but not least, this can reduce your stress levels and, as any business owner will confirm, that can be invaluable in itself. You’ve enough on your plate keeping all your other plates spinning without having to worry about cashflow. Invoice financing removes the stress of this by advancing cash against unpaid invoices.
Invoice Finance advantages
That said, there are a few issues to consider. There factoring fee will be an added expense. Many companies habitually lock you into a contract in which all your invoices are processed in this way. Sometimes rates can appear favourable at the start, but monthly fees can eat into your revenues.
It can also leave you thinking you have more coming into your business than you think. It’s easy to look at the value of each invoice but forget about the various fees being paid to your invoice finance company. If you’re not careful, this can lead you to over estimate your financial position and make poor decisions about the future of your business.
All in all, though, this can be an affordable, accessible and effective tool to overcome the serious challenge of late payments. It can keep the wolf from the door and prevent you becoming another casualty of the delinquent payer.
Recourse and Non-Recourse Invoice Finance
This terminology is commonly used in the invoice finance industry: with recourse means that, should the customer not pay the invoice, the borrower remains liable. Typically, invoice finance is with recourse as standard, unless otherwise arranged.
Choosing non-recourse will come with a higher rate but can bring the peace of mind that, should the customer default, the lender will assume responsibility with the debt.
Applying for Invoice Finance
Applying for Invoice Finance is simple. Invoice Funding are one of the UK’s leading Invoice Finance Brokers. To find out if Invoice Finance can support your business, simply complete the online enquiry form.