Invoice finance is an excellent source of finance for small to medium businesses that are looking to stabilise their cash flow and grow their company. Invoice finance can be used to cover a wide range of expenses including, but not limited to, expansion, hiring new staff, marketing campaigns, and purchasing new equipment or stock.
Unfortunately, many businesses are forced to close their doors because of crippling cash flow issues, but this doesn’t have to be your fate. When cash flow is tight, invoice factoring could be just the solution you need to get past the roadblock. Invoice finance can help stabilise your business and keep you moving in the right direction.
Invoice Finance – the flexible solution.
Invoice finance is a facility that allows businesses to borrow money against the value of unpaid invoices. In other words, businesses can use these invoices as collateral to secure funding. This can be an extremely helpful tool 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). However, 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.
Is my business eligible for invoice finance?
To be eligible for invoice finance, your business must:
- Have outstanding invoices with creditworthy commercial customers for goods/service supplied
- Be able to provide accurate records of invoice value, date issued and debtor details
- Invoices must not be older than 90 days
- Issue goods or provide services on a “sell and forget” basis
If you can answer yes to all of the above, then invoice finance could be a great option for your business.
Types of invoice finance
There are three distinct types of Invoice Finance available:
- Disclosed Invoice Discounting
- Confidential 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. 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. 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.
Disclosed Invoice Discounting
This solution allows you to retain control of your ledger management whilst receiving the benefit of prepayment against your debtors. At Partnership Invoice Finance we operate this slightly different to most other providers preferring to run a shadow ledger facility which allows more flexibility in funding and removes the need for monthly reconciliation.
Allocation of cash as and when received also removes the common problem of having to wait for the adjustments within the month-end reconciliation being applied.
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.
For all these services optional bad debt protection may be provided.
Finding an Accredited Lender.
The next step is finding an accredited funder that suits your business needs. We think 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?
- How do I know if invoice finance is the right solution for my business?
- How can invoice finance help my business grow?
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 is therefore 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.
For more information on getting started with invoice finance, contact us.