What is Invoice Finance and how could it help your business?
Invoice finance is a facility used to quickly release cash locked up in unpaid invoices. Suitable for a variety of companies with B2B customers, it allows businesses to receive a large sum of each of their unpaid invoices as soon as the invoice is raised. The basis for the security for the ‘loan’ lies in the company’s unpaid invoices.
Depending on the level of control you wish to retain over collection and your sales ledger, the types of invoice finance include discounting, factoring, selective invoice discounting, debt factoring, accounts receivable factoring and spot factoring.
The product is a funding solution aimed at businesses in industries with longer payment cycles, tending to be paid by customers by a minimum of 14 days.
How does it work?
You raise your invoices as per usual with your customers.
A large sum of the invoice amount (a pre-agreed percentage with the funder) is then released to you– varying between 75% to 95% of the total value. Payment is usually made within 48 hours of submitting your invoice and, depending on the type of facility you choose – you may or may not remain responsible for the control of your sales ledger and chasing payments.
Once the invoice has been paid by the customer, the funder will release the remainder of the invoice amount, minus their nominal fee for the service.
This nominal fee refers to a Service Charge and Discount Charge. The Service Charge covers the lender’s management, collections and administration costs and is worked out as a percentage of your business’ gross turnover – typically between 0.75% and 2.5%.
The Discount Charge is levied on the amount you draw down on. This falls in at around 1% and 3% over base rate and is calculated daily once the money has been advanced. So, the longer your customer takes to pay – the higher the Discount Charge.
Invoice financing can be a selective facility, used for tricky customers or larger invoices, or can be used across the entirety of your sales ledger, and using this facility for chosen customers is referred to as Selective Receivables Finance.
Invoice finance works the same as a revolving credit line or several shorter bank loans. The difference here lies in the lack of need for assets to offer up to the lender as collateral. There are no personal guarantees required for it either.
Types of Invoice Finance
There are two main types of Invoice Finance –Discounting and Factoring.
Invoice discounting is the more private facility available.
You retain personal responsibility for your sales ledger and the chasing of payments from customers, and your customers remain entirely unaware that there is involvement from an invoice finance lender. If your preference is for your financial facility to remain confidential, then this is the right facility to choose.
Invoice Factoring is a more hands-on, visible facility for the lender.
This will see the lender’s team of credit controllers collect due payments on your behalf, with the payments deposited into a trust account visibly run by the lender.
Should your business consider invoice finance?
Invoice finance facilities have become popular cashflow solutions for businesses to heighten their working capital with minimal effort and more time to focus on their operations.
It has become a popular form of alternative finance for those who want or need to avoid the multitude of eligibility requirements that come with traditional finance, such as loans and overdrafts. Risk-wise, invoice finance funders tend to rather assess the credit history of the customers with due invoices rather than your own company’s, although your own credit history can impact how preferential the rates you receive are.