What is Invoice Finance?
What is invoice finance?
What is invoice finance? Through invoice finance, a company sells its accounts receivable (invoices due to be paid) to improve its working capital. And this in turn helps businesses pay employees and suppliers, improve cash flow, and invest in operations and growth earlier than if they had to wait until their customers paid their balances in full. This provides a business with more financial flexibility than most other types of traditional loans.
One thing that many small to medium businesses (SMEs) struggle with is business funding. This can be a major roadblock to growth and success. One solution for improving cash flow is invoice finance. Invoice finance is a type of financing that can help SME’s bridge the gap between their outstanding invoices and getting paid. With this funding in place, businesses are able to settle their own debts sooner, in turn they can potentially receive a discount on future invoices i.e. enhanced payment terms from their collectors, and take on new contracts with larger clients and suppliers, without worrying about cash flow issues. Another positive benefit of invoice financing is that a businesses credit score is supported by debts which are paid off in a timely manner.
Invoice finance enables businesses to receive funding within 48 hours for the invoices they issue. This can be a lifeline for businesses that need to keep their cash flow positive to stay afloat and grow.
Below, we will discuss aspects of invoice finance and answer some frequent questions about it. To resolve the query “what is invoice finance”? We will also focus on how invoice finance can benefit small businesses specifically.
There are two distinct types of Invoice Finance services that we offer at Partnership Invoice Finance:
Recourse Invoice Factoring
Disclosed Invoice Discounting
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.
With access to an online system that allows you remote access to your ledger enabling you to remain informed of your financial situation.
Factoring 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 a stronger cash flow. An accredited funder will ensure diligence when determining the correct identity of the debtor and corresponding with them on a timely basis. The funder maintains constant contact and a good rapport with your customer, ensuring prompt payment of debt.
This solution allows you to retain control of your ledger management whilst receiving the benefit of prepayment against your sales ledger. We operate this slightly different to most other providers preferring to run a shadow ledger facility to allow more flexibility in funding and removes the need for monthly reconciliation.
Allocation of cash removes the problem of having to wait for the month-end reconciliation adjustments being applied.
Monthly statements are sent to the debtors to update them on the position owing. You will need to demonstrate good credit management procedures to qualify for this facility.
You will have access to online system which allows you remote access to your account.
Factoring or Invoice Discounting, which is best for me?
If you are considering factoring or invoice discounting, it’s worth knowing the key differences between each service.
With both factoring and discounting, the outcome is the same; an advanced payment received into your business to boost working capital and establish a healthy and stable cash flow. Invoice finance is an alternative financial solution for businesses selling goods or services to other businesses (B2B) but is not suitable in all cases, particularly where sales are of a contractual nature or involve stage payments.
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, making chasing phone calls, 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. This is then generally paid into an account held jointly by the funder and the business. This service tends to be used by larger businesses with established in house credit control teams.
Key differences between factoring and invoice discounting
Small to medium business: Turnover under £1mn.
However, business with turnover above £1mn benefit from outsourcing their credit control.
Medium to Large business: Turnover above £1mn.
Small businesses with established credit control benefit from the flexibility of this service.
Full sales ledger management service provided.
No sales ledger management, you do receive a shadow ledger.
Can be more costly than Invoice Discounting as Factoring has an additional service which frees up the businesses team.
Typically, cheaper than Factoring as the sales ledger remains in control of the business.
In summary, what is invoice financing?
Invoice finance is an alternative 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.
In conclusion, invoice finance is a powerful financial tool accessible to businesses who are starting up, or wishing to grow an already established business to businesses facing rejection from traditional bank loans, going through a financial restructure.
Invoice finance can be used even if you’ve been previously rejected from the bank, might not be considered creditworthy, or have only recently started trading.
Businesses can receive up to 80% of the value of invoices within 48 hours balance (less fees) when their customer pays.
Helps you bridge the gap between invoicing the end customers and receiving the final payment.
Helps manage cash flow as your business grows, to enable sustainable growth.
It provides an avenue for maintaining positive cash flow, unlocking working capital, and fostering sustainable growth. Contact us at Partnership Invoice Finance today to explore business funding options or address any queries.