As a small or medium business owners that would like to invest in your future success, gaining access to funds may be one of the hardest aspects of reaching your goals. A lack of funds can mean that your business cannot invest in machinery, software or staff at the right times to meet the needs of your customers or to put in credible bids for future work. Invoice discounting lenders can be a lifeline for you and could help you to get funds you may otherwise struggle to access. Finding these lenders is easier than you may think and there are options available for almost all businesses.
What is invoice discounting?
There are two main types of invoice finance that are available to business owners: Invoice Factoring and Invoice Discounting. Invoice discounting is when a company’s unpaid invoices are used as security for a loan, but the relationship between you and the lender is not disclosed to the customer. This last point is the main difference between invoice discounting and invoice factoring. You get to maintain responsibility for invoice processing and chasing, and the customer is not aware that there is a lending relationship involved.
The process for invoice discounting is very easy, once you have set up your account. You simply need to forward a copy of an invoice to the lender, who will provide a percentage of the value of an invoice as a loan before the invoice is paid – allowing for simplified cash flow and a steady income across the month. The amount the company can borrow will depend on the overall turnover and as it increases, so does the facility. The loan is paid back to the lender once the invoice has been paid by your customer, plus a fee and interest on the loan amount.
What are the benefits of invoice discounting?
There are many reasons why you may choose to use an Invoice Discounting Lender rather than choosing a more traditional loan structure.
- For many small businesses, payment terms from the larger customers can be upwards of 120 days. For many, this lack of cashflow can be devastating for their investment plans. Invoice discounting gives you access to these funds within hours of submitting your invoice.
- You will remain fully in charge of your invoices, how you operate your credit terms and invoice chasing, meaning that your customers have no relationship with your lender, giving you full control and confidentiality.
- These services can give you a huge amount of flexibility as it is not a set amount that is borrowed each month – you simply borrow to the value of whichever invoices you choose to use as collateral.
- Business owners can quickly move their company forward by investing at the right time, even if they are waiting on invoices to be paid.
Invoice discounting lenders
Invoice Discounting is offered by a huge range of lenders including most of the High Street banks. Independent lenders tend to operate in their own niche and will only lend to companies with certain turnovers or in certain industries. All will use similar criteria to decide on the terms of your loan. This will include your turnover, the value of the invoice and the creditworthiness of your customers. You may also have to prove that the invoice is credible, perhaps by showing previous paid invoices from that customer or choosing an invoice that is paid regularly, such as a timesheet.
The interest charges on invoice discounting can be quite high, mostly because it is a relatively short-term loan and you can expect to pay a set up fee and a fee for each transaction. You will start paying the interest as soon as you draw down the funds, while the fee will be charged once your customer has paid their invoice. In some cases, you may be expected to pay a monthly fee to retain the service, regardless of whether you draw down on any invoices.
Many lenders prefer businesses that have been operating for longer than 2 years and with a turnover in excess of £250,000. However, there are other options available, if this doesn’t include your business.
Get in touch with one of our professionals at Funding Bay to find the best lender for you.
Check out our invoice finance calculator here.
