Everything SMEs Need to Know About Invoice Finance

Running a business is hard work – and that’s a fact! There are so many things to think about and so many decisions to make. One of the most important decisions you need to make is how you’re going to manage your finances. Unfortunately, many businesses are forced to close their doors because of crippling cash flow issues, but this doesn’t have to be your fate. Invoice finance can help stabilise your business and keep you moving in the right direction to thrive and grow.

In this blog, we will provide a comprehensive guide to invoice finance. We will cover everything you need to know about this financing option, including the different types, how it works and who can use it.

What is Invoice Finance?

Invoice finance is a type of financing that can be used by businesses to improve their cash flow and invest in operations and growth earlier than they would do waiting for customers to pay. In brief, it works by businesses selling their invoices to a third party at a discounted rate to get access to the cash quickly. The third party then pays the business an agreed-upon amount, minus the discount, and collects payment from the customer when the invoice is due.

Invoice finance is an extremely helpful solution for SMEs that are facing cash flow issues and is much more flexible than most other types of borrowing, giving you access to money when needed the most. Factoring isn’t just an excellent source of finance for smaller businesses, it’s a perfect way to bring stability to a business (and ensure that credit control doesn’t fall through the gaps).

Types of Invoice Finance

There are two main types of invoice finance: factoring and discounting.

Factoring and discounting are both ways for businesses to receive money, but they differ in who collects in the outstanding sales ledger. Factoring means that the funder will be responsible for all aspects of credit control including collecting payments from customers, raising monthly statements, sending collection letters, etc. This is a fully serviced outsourced provision.

With invoice discounting, the business manages its own sales ledger and collects payments as normal from the client. Invoice discounting can either be disclosed or confidential. This service tends to be used by larger businesses with established in-house credit control teams.

Let’s look at the invoice finance options in more detail.

Invoice Factoring – This is an expertly managed funding solution covering all aspects of your sales ledger management, from the moment of the initial sales transaction to the point when the debt is paid. Generally, there is also an online system that allows you remote access to your ledger and control account, enabling you to remain fully appraised of your position at all times. Reliable and efficient management of your ledger will naturally create strong cash flow. The funder maintains constant contact and a good rapport with your customer, ensuring prompt payment of debt at the same time as providing an advance based on the outstanding invoices

Disclosed Invoice Discounting – This solution allows you to retain control of your ledger management whilst receiving the benefit of prepayment against your debtors. Invoices you send will be required to include a notice of assignment confirming the funder’s involvement, and monthly statements are sent to the debtors to update them on the position owing.

Confidential Invoice Discounting – As with disclosed invoice discounting, this facility allows you to keep control of the ledger management procedures while receiving the benefit of prepayment against debtors. However, with this type of facility, your invoices will not carry a notice of funder involvement and no monthly statements are sent to your customers. As with disclosed invoice discounting, but even more so, a history of excellent credit control with robust systems is required.

Invoice finance is a flexible funding solution for businesses that need to level out cash flow during times of growth or to fund innovation. It’s reliable, grows as you grow, and is extremely affordable with many options available to suit your business needs.

Factoring or Invoice Discounting, Which Option is Best for My Business?

For both factoring and discounting, the result is the same; a cash injection into your business to boost working capital and establish a healthy and stable cash flow. Invoice finance is a financial solution for many small businesses selling goods or services to other businesses but is not suitable in all cases, particularly where sales are of a contractual nature or involve stage payments or sell and return.

If you have good internal credit control procedures in place then you may prefer an invoice discounting facility, but if you would rather outsource this often time-consuming, and onerous task, to credit control professionals then factoring is the choice for you.

Key Benefits of Invoice Finance.

  • Businesses can release around 80-90% of the value of invoices straight away and receive the balance (less fees) when their customer pays.
  • Other assets are not needed to access invoice finance.
  • Invoice finance can be used even if you’ve been previously rejected by the bank, might not be considered creditworthy, or have only recently started trading.
  • It’s competitively priced and is a viable cost-effective finance solution for growing businesses.
  • Helps you bridge the gap between invoicing the end customers and receiving the final payment.
  • Helps manage peaks and troughs in cash flow as your business grows.
  • Improves your business cash flow and working capital.
  • Has an easy-to-access and straightforward and short application process.
  • It’s flexible; you choose which customers you want to factor.

And while we are looking at the extensive list of benefits, let’s dispel the myth straight away that invoice finance is the last choice for businesses looking to raise finance. This definitely isn’t the case, in fact, for many, it can and should be the first choice.

How Popular is Invoice Finance?

Invoice finance is actually one of the more popular forms of financing for small businesses due to its accessibility and flexibility. According to UK Finance, an invoice finance facility ‘supports clients of all sizes, from start-ups to corporates, and provides particularly important support for small businesses.’ UK Finance also reports that currently, around 40,000 businesses benefit from invoice finance in the UK.

Invoice finance is not only for growing and successful businesses, but it is also a popular choice for businesses that may struggle to obtain traditional financing. This is because invoice finance companies typically do not require businesses to have perfect credit or years of successful trading in order to qualify for financing, and nor do they generally ask for additional collateral such as charges on properties as the invoice finance company principally looks at the credit rating of your customers and the way you serve these.

A reputable invoice finance company will also work closely with businesses to ensure it really understands what they do and how they do it, it is far more of a partnership than an arm’s length financial transaction as they support you to achieve success and growth.

Invoice Finance for Different Industry Sectors.

Invoice finance is used by many businesses, across different industry sectors such as:

  • Couriers & Hauliers
  • Temporary recruitment/staffing agencies
  • Manufacturing
  • Wholesales
  • Nursing Agencies
  • Healthcare Medical Supply
  • Cleaning
  • Logistics
  • Engineering
  • Printers

Invoice Finance Can Be Used for a Variety of Purposes.

Invoice Finance can be extremely helpful for business owners who are struggling to make ends meet for a variety of reasons, and the cash can be used for whatever purpose you need it for within your business. For example, many business owners use invoice finance to pay for inventory or to cover the cost of unexpected expenses. Invoice finance can also be used to help businesses expand their operations or hire new employees and purchase stock. The money is yours and you can choose how it’s going to most benefit your business. However, for funding capital equipment and the like, it is better to not use up your working capital in this way but rather seek term debt to work alongside your cash flow facility.

Is my Business Eligible for Invoice Finance?

Not every company is suitable for invoice finance, and whilst getting started is a straightforward process, it’s important to consider eligibility before you start down the path of investigating if it’s the right solution for you.

To be eligible for invoice finance, your business generally must:

  • Have outstanding invoices with creditworthy commercial customers for goods/services supplied
  • Be able to provide accurate records of the invoice value, date issued and debtor details
  • Have invoices no older than 90 days
  • Issue goods or provide services on an “in arrears/sell and forget” basis

Finding the Right Invoice Finance Partner.

When choosing an invoice finance company, it’s important to do your research to select a company that has a good reputation, offers competitive rates, and importantly, is a Member of UK Finance.

When searching for an accredited funder that suits your business needs, it’s important to ask these questions as a business owner before committing to an invoice finance agreement with a provider.

  • What information will you need from me?
  • How much can I borrow against my invoices?
  • Are there any restrictions on how I can use the funding?
  • How long does it take to get set up?
  • What is the process of getting started with invoice finance?
  • What will it cost? Are there any additional fees?
  • What are the consequences of not being able to repay an invoice finance facility?
  • Are you a member of UK Finance?

What Happens Once I Have Found a Provider?

Once you’ve found an accredited provider, and they have approved a facility for your business, the next step is to sign an invoice finance agreement. This is a legal contract between your business and the funder, and clearly sets out everyone’s responsibilities under the agreement so it’s important to read the small print carefully before signing.

The agreement will outline all the fees, terms, and conditions of your invoice finance facility. It’s important to make sure you understand this before signing, as you undertake to run the facility in line with the agreement’s requirements and you will be liable for any charges outlined in the contract.

Alongside the agreement your company will be asked to provide an all-asset debenture or charge on book debts enabling the funder to take security over your invoices and this is typically combined with a Director’s Guarantee.

Once they have received your signed agreement and any other documents required, your facility can be set up, with your current outstanding invoices loaded generating an initial cash lump sum and you can start using your invoice finance facility. 

Working with Partnership Invoice Finance – An Experienced and Accredited Lender.

At Partnership Invoice Finance we want to help businesses grow, which is why we offer invoice finance to start-ups, SMEs and those requiring funding up to and in the region of £1,000,000 and sometimes even more. We will expertly manage all aspects of your sales ledger management function, from the moment that you notify us of the sales transaction, to the point when the debt is paid.

Contrary to widespread belief, invoice finance is not just about how much prepayment can be drawn, but critically the quality of service rendered. Reliable and efficient management of your ledger will naturally create strong cash flow. Our procedures rely upon personal, regular customer contact rather than just a sequence of statements and overdue letters raised and dispatched by an automated system.

Please contact us if you have any further questions or would like to discuss your options with our expert team.