Invoice finance is a little known funding option that can do big things for your business’s cash-flow. It has grown massively in popularity in the last couple of years, and according to figures from the Asset Based Finance Association (ABFA), it has become the fastest growing short-term funding type for SMEs.
What is invoice finance?
In simple terms, invoice finance allows businesses to use their unpaid commercial invoices as security for a loan. The process itself is very straightforward…
- Every time you raise an invoice with a commercial customer you also send a copy of that invoice to the finance provider;
- The finance provider releases up to 90 percent of the value of the invoice in as little as 24 hours;
- The invoice is paid by the customer as normal;
- You receive the remaining balance of the invoice, minus the finance provider’s fee.
How can invoice finance help growing businesses?
Maintaining a healthy level of cash-flow is one of the biggest challenges a growing business will face. This has been exacerbated in recent years by the increase in the number of payments that are not being made on time.
According to the Federation of Small Businesses (FSB), 85 percent of SMEs are affected by the late or non-payment of invoices, with the overall value of outstanding payments to businesses in the UK worth an estimated £34.9billion. The severity of this situation has been highlighted by the insolvency trade body R3, which has found that late payments are a primary or major cause of 23 percent of insolvencies in the last 12 months.
Invoice finance gives businesses much greater control over their cash-flow. This improves their ability to plan for the future, invest in the growth of the business and make their own payments on time.
The different types of invoice finance
There are a number of different arrangements that come under the umbrella of invoice finance. This includes:
In an invoice factoring agreement, the finance provider takes control of the business’s credit control processes. This includes dealing with customers directly, handling the administration associated with managing debtors, sending payment reminders, collecting payments and even taking legal action where necessary.
Invoice factoring can be particularly attractive to smaller businesses that do not have their own credit control or finance department, as they essentially outsource this function to the lender. They then have more time to focus on growing the business.
In this type of agreement the finance provider’s involvement is reduced. Credit control is not included as part of the invoice discounting process, which means there’s no reason for your customers to know you’re using a finance provider. However, you will need your own established credit control process in place to ensure your customers are creditworthy.
Due to the reduced involvement of the lender, invoice discounting is often cheaper than invoice factoring. However, the fact that a company must have its own credit control department in place makes this type of agreement more suited to larger firms.
Selective Invoice Finance and Spot Factoring
There’s also a third option available to UK companies that allows individual invoices and clients to be financed, rather than a firm’s entire debtor book. This gives businesses more control over their cash-flow without losing a percentage of every invoice they issue.
In this type of agreement, the creditworthiness of the customer is essential to the agreement, so any customer invoice you hope to include must look good on paper.
How can we help?
Prosper provides a comprehensive approach to accountancy, tax & business growth services for start-ups, SMEs and growing companies across the UK. We are your bookkeeper, accountant and finance director all rolled into one. Check out prosper.accountant to learn more about how we can help your business.