Making use of invoice finance can save you a lot of time and worry. Exactly how might using it benefit your business?
Improved cash flow
With invoice finance, it’s easy to predict when the cash will arrive in your business, as you will receive a significant proportion of the invoice’s value at the time you issue the payment demand. If you don’t have invoice finance in place, then hopefully you will still receive 100% of the invoice’s value, but the sum will only be received when the client decides to pay.
Because you know when the funds will be received, having invoice finance in place can greatly assist with cash flow management.
Helps with the payment of your own debts
If you have credit commitments of your own, then it’s much easier to repay them if you know when the cash from the invoices you issue will be received.
Use the cash for any purpose
The payments you receive from the finance provider under an invoice finance arrangement can be used for anything you wish. For example, you can use it to purchase stock, buy new equipment, repay debts, or recruit new staff.
The finance company can chase invoices on your behalf
If you choose a factoring arrangement, as opposed to an invoice discounting arrangement, then the finance provider will chase up invoice payments from your clients on your behalf. This can take a weight off your mind and give you more time to concentrate on running your business.
There’s the option of bad debt protection
If you enter into an invoice discounting arrangement, then the lender might offer a ‘non-recourse’ facility. This means that the provider promises to pay you the full amount, minus a deduction for their fee if a client ever fails to pay an invoice completely.
How does invoice finance work?
The term ‘invoice finance’ usually refers to one of two arrangements:
- Invoice discounting – when you issue an invoice, the finance provider immediately advances you a sum of money equivalent to a proportion of the invoice’s value, say 75%. Then, when the client finally settles the invoice, the remaining portion of the payment is forwarded to you, minus the lender’s fee. A typical fee might be approximately 3% of the invoice amount. You retain responsibility for your own credit control function and for chasing the client for payment of the invoice.
- Factoring – as with discounting, a significant proportion of the invoice amount is paid upfront by the lender, and again, they will take a portion of the transaction value as a fee at a later stage. However, in this case, you will effectively be outsourcing your credit control function. The provider will liaise with your clients on your behalf to ensure invoices are settled. This could mean that you save time and worry now you no longer have to chase your invoices, however with factoring, it’s much more likely that your clients will find out that you have entered into an invoice finance arrangement.
Disadvantages of invoice finance
However, this form of funding also has several potential downsides:
- It might only be available to larger companies with established credit control functions. Before lending, a provider might require you to have turnover above a set level or to have been trading for a certain number of years
- It’s likely that the financing will only be available for business-to-business invoices, so if your business regularly invoices members of the public, you might not benefit from invoice finance
- In the long run, it can reduce your profits, as a portion of every invoice amount will be taken by the lender as a fee
- Once you have an invoice finance arrangement in place, it can be difficult to terminate it without adverse consequences for your business. For example, if you have the security of knowing that you’ll receive payment as soon as you issue an invoice, how will you adjust to a situation where this suddenly isn’t the case?
- If you have an invoice finance arrangement, it can be more difficult to obtain other forms of finance
Get in touch with us at Funding Bay for your invoice financing needs.
Check out our invoice finance calculator here.
