In this guide we look at the advantages and disadvantages of invoice finance.
Whether you are a small start up business struggling with working capital, or a larger organisation looking for a cash boost to fund expansion plans.
One benefit is that it enables you to improved cash flow this is done by releasing cash tied up in outstanding invoices, giving your business an immediate cash injection and on-going supply of cash that grows in line with your sales.
If you are trading on credit terms within the business to business marketplace, then Invoice finance is for you and your business, so let’s look at the benefits of Invoice Finance.
Advantages of Invoice Finance?
One advantage and benefit to invoice finance is that it is designed to be used by start-ups and smaller businesses, once that do not have an established accounts team or those who want the benefits of a funding and collections service. As well as providing the finance, the funder will manage your credit control, chasing and collecting outstanding invoice payments on your behalf, turnover usually starting at about £50,000.
Invoice Finance is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. It might also factor their invoices to mitigate credit risk.
A great benefit to business is that once an invoice is issued, rather than waiting 30, 60 or 90 days to be paid by a customer, by using invoice finance a business can release up to 95 percent of the value of an invoice within 24 hours of its issue.
1. Increased Cash Flow
Invoice finance providers generally work much faster than banks in assessing the viability of the lender. Many lenders are able to generate cash in as little as 48 hours meaning discounting has significant speed advantages over traditional finance.
2. Speeds up the Working Capital Cycle
With invoice financing, cash that has been locked in unpaid invoices can be freed up quickly the liquid cash to keep the cogs of the business whirring and speed up the working capital cycle.
It can be particularly useful for businesses with a smaller number of clients who pay larger value invoices – in these cases the late payment of a single customer invoice can pose risk to the overall health of the company.
3. Business Gets Help with Credit Control
With an asset based facility, the credit control is carried out by the invoice finance provider. This allows the directors to run the business as this task is taken care of. It also ensures credit control is carried out every month, and has a saving to the business as no third arty is needed or employed.
4. Only pay Interest on the Money that you Borrow
For many businesses, invoice finance offers a cost saving over other forms of invoice finance, this is due to you only pay the interest on the money that you borrow, if you don’t draw down there is no fee payable.
5. Paying of Suppliers Early
Since many businesses hampered by restricted cash flow and paying their own supplies late, invoice finance makes it easier to pay suppliers faster and possibly to negotiate early payment discount as a result
6. Bad Debt Protection Offers
As this industry grows more competitive some invoice finance lenders offer bad debt protection at a reduced rate for limited period of time. This offers protection if the customer becomes insolvent.
7. Better Working Capital Means you can Expand
Many businesses using invoice finance strategically as a way of increasing working capital so the company can fuel its growth.
Disadvantages of Invoice Finance?
Every source of finance is not without its drawbacks. Invoice finance will not be the perfect match for every business and there are a number of disadvantages you should be aware of so you can make an informed decision.
1. Smaller Companies may Find it Difficult to Obtain Credit
Invoice financed is generally an option for businesses with a turnover of about £150,000, so one of the the disadvantages this form of finance is that smaller enterprises may find it difficult to find lenders willing to accept them.
Usually there are some fairly strict ground rules, and the company must be able to demonstrate an established track record. Whilst there are lenders now springing up to fill this gap some of these may charge a higher fee as a result.
2. Higher cost
Because it is a short-term loan, the funding of invoices usually comes with high costs, and higher fees than traditional bank loans or overdrafts.
3. It is Possible to Become Reliant on Invoice Financing
Whilst the goal of having your invoices funded it is always to manage cash flow strategically and with the overall success of the business in mind, it is also possible for businesses to become trapped in a debt cycle, unable to operate without the existence of monthly cash flow arrangements
4. Additional Business Finance
Since certain forms of business finance utilise accounts receivables as part of the loan collateral, the existence of of an invoice finance arrangement (in which the invoice becomes an asset of the finance company rather than yourself), maybe preclude gaining additional finance.
5. Your customers must be another businesses
Invoice finance is only available on commercial invoices, meaning you have to trade with another business. If you end user is the general public then this form of finance will not be available to you.
Apply for Finance Facility
At Invoice Funding we have a team of consultants who specialist in finance facilities for business. The funding brokers can explain the process and search the market on your behalf to secure the best facility for your business needs.
Please feel free to complete the online enquiry from on our website and to understand the benefits of Invoice Finance and one of the team will contact you.
Read more: Invoice Finance vs Trade Finance
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.