Invoice Finance
Cash Flow Problems and How To Fix Them
The Five Most Common Cash Flow Problems and How To
Business financing simplified
Invoice Discounting
in a nutshell
Invoice discounting is an invoice finance product that allows you to borrow funds against your entire sales ledger. Usually, a business will be able to borrow up to 90% of the outstanding invoice value. In invoice discounting does not include credit control as part of the service. As such, the most common form of invoice discounting is Confidential Invoice Discounting (CID), which is where the funder sits behind, and funds against the sales ledger confidentially from the end debtor. Invoice discounting facilities can also have the lender disclosed to the end debtor, although mainly this happens in cases where the business is liable to disputes or claw-backs (eg construction).
With all forms of Invoice Discounting, the borrower will need to re-divert customer payments to the lender’s trust account (in the borrower’s name). Unlike Factoring, where the lender gets involved in collections, the customers and clients just keep paying as normal and in CID, do not know the lender is involved.
A working example; Company A is set up with an Invoice discounting facility (confidential) – they have £250,000 in outstanding invoices and have a drawdown % of 85%. They can therefore access £212,500 of cash on these invoices. When an invoice is paid (eg £50k), the amount drawn goes down to £162,500 on invoices outstanding of £200,000, therefore, the company has drawn 81.25% of eligible receivables, and has the ability to draw another £7,500. The same process when a new invoice is raised (eg £50k), then an additional £42,500 is available to draw down.
The security required depends on the lender but as a general rule, you will need to offer at least first charge debenture on your accounts receivable, and it is likely to be a sort of guarantee, either a personal guarantee or a form of anti-fraud indemnity.
Some of our lenders
Cash flow
Leveraging your future cashflows is going to give a working capital increase. The balance sheet is not impacted too much as the asset moves from AR to cash, and as such, is cash flow positive for the borrower.
Director protection
Invoice finance is secured on your debtor book, so in a worst-case scenario, the likelihood is that your lender will be able to collect their borrowing on your outstanding debts being repaid. As such, the director is likely to be less personally liable than they might be for an unsecured loan.
Scalable
Invoice discounting facilities will tend to grow as you grow. Given you can draw up to 85% of the outstanding invoices, if your invoices grew by 50%, the likelihood is that the facility can flex with that.
Lender partnership
With invoice discounting, the lender tends to look at the relationship as more of a partnership than a typical loan lender - they will grow as you grow and as such are vested in making sure that they understand your business and understand your plans.
