If you run a health and social care business, such as a care home, you’re probably all too aware of how easy it is to experience cash flow difficulties – which invoice financing can help with. You might need to make significant purchases, such as beds, equipment, or furnishings; or take on temporary staff at short notice.
These cash flow problems can be compounded if your residents are slow in paying their fees or if your business customers take time to settle your invoices. Invoice financing won’t help with late payment issues from residents, but it most certainly can help solve cash flow problems relating to your business-to-business customers, which might include the NHS, Social Services, etc.
Why Invoice Finance Works
When you issue an invoice to a business customer, it is probably most likely that the invoice will eventually be settled. However, it’s inevitable that some of these customers will settle their invoices almost immediately, while others will take much longer to pay, and payment might need to be chased up on more than one occasion. This all means that it’s very difficult to predict exactly when the cash will arrive in your account.
Invoice finance removes this uncertainty, as it ensures that you receive a significant payment almost as soon as you issue each invoice. When each invoice is issued, the invoice finance provider advances you a payment for up to 95% of the invoice’s value (some invoice finance arrangements might see you receiving smaller amounts, such as 70-80%). When your customer pays the invoice, you receive the remaining portion of the invoice value, less a small percentage, which the lender retains as their fee.
All invoice finance arrangements work in this basic way, but different types of invoice finance have their own specific features:
- Invoice discounting – this is a confidential arrangement between you and the provider. Your customers won’t be told that you have an invoice finance arrangement in place, and you retain responsibility for chasing up payment of all your invoices
- Invoice factoring – here the factor (lender) purchases the invoices from your ledger and takes control of chasing up payment on these invoices. This means that your customers will be aware that you have an invoice finance facility in place, and it’s essentially the case that the finance provider will take over your credit control function. However, many businesses welcome the hassle of no longer having to continually chase payment on invoices
- Selective invoice finance – with most invoice finance arrangements, the lender will expect to provide you with funds for every invoice you issue. However, selective invoice finance allows you to pick and choose which invoices are included in your financing facility
The advantages of invoice finance for your social care business might include:
- It should improve your cash flow, reducing worries about running out of money or needing to borrow via alternative methods
- It can help you pay your own suppliers earlier than would otherwise be the case
- The provider lends against the unpaid invoice and does not require you to provide any business assets as security
- You can set up an invoice finance facility within a couple of weeks of making contact with the provider. The provider should then advance you the funds within 24 hours of each invoice being issued
- The amount of finance you can access increases as your business grows
However, there are also some reasons why invoice financing might not be appropriate:
- It may not be available to smaller businesses who don’t issue as many invoices, or to businesses who have only been trading for a limited period. Where a factoring company agrees to lend in these circumstances, they might take a larger fee
- Entering into an invoice finance arrangement can make it harder to obtain other forms of credit
- It can be difficult to exit an invoice finance arrangement, as you would then suddenly have to adapt to a situation where payment times for your invoices were uncertain once again
- Your profits will be impacted by the lender taking a fee from the value of every invoice
- You might not want your customers to know that you have this type of arrangement in place, and with a factoring arrangement, they certainly will be aware of this
- Invoice finance is not available on any invoices issued to your residents. It’s only available on invoices issued to other businesses
If you don’t feel as if invoice finance is the right product for your health and social care business then there are a variety of other financial products that might fit your needs better.
Get in touch with us at Funding Bay for your invoice financing needs.
Check out our invoice finance calculator here.
