Many people in the restaurant trade know all too well that their cash flow can fluctuate; fortunately, invoice finance can provide valuable assistance with cash flow issues for restaurants. Seasonal fluctuations in trade were common for many restaurateurs, even before the impact of Covid-19. Restaurants might also need to spend significant sums on recruitment, the purchase of new equipment, the development of new menus, or refurbishments.
Given that these financial pressures exist already, any failure by your business customers to settle invoices on time could be the final straw that breaks the camel’s back.
Naturally, your regular customers will pay for their meals at the time using credit or debit cards, but invoice finance can be used every time you issue a payment notice to another business.
Normally, when you issue an invoice, you largely lose control over when the money gets paid. Some customers will pay up almost immediately, while others might take weeks, or even months, to settle the invoice, regardless of how many times you chase them up. This uncertainty as to when you will receive the payment can be very worrying and can most certainly make your cash flow concerns worse.
How to Use Invoice Finance
With this facility, however, you have the peace of mind of knowing that you will receive a payment within a day or so of issuing each invoice. This is because your invoice finance provider will advance you somewhere between 70% and 95% of the value of each invoice; the exact percentage will depend on the terms of your invoice finance agreement. Then, when the customer settles the invoice, you receive the rest of the sum due, less a small percentage that is retained by the provider as their fee.
If you wish, you can also have the invoice finance lender chase up the invoices on your behalf, effectively acting as your credit control function. This form of invoice finance is known as ‘factoring’, whereas if you retain responsibility for chasing payment yourself, the arrangement you enter into is known as invoice discounting.
Most invoice finance arrangements involve the provider giving you an advance on every single invoice you issue. However, it may be possible for you to obtain ‘selective invoice finance’, should this be your preference. Here, you can choose which invoices to include in the finance arrangement; i.e., the lender provides you with an advance payment on selected invoices, while for the remainder, you simply have to wait for the client to pay.
Another option that might be available, for an additional fee, is ‘bad debt protection’, where the provider will cover any invoices where the customer never pays up.
We’ve already mentioned how invoice finance can ease your cash flow concerns. Other reasons why this form of funding might be right for you include:
- It can make paying your own bills, e.g., to your suppliers, much easier if you know cash will be available
- Invoice finance can usually be obtained quickly – it should take no more than two weeks to set up the agreement, then payment for each invoice should be received from the lender within 24 hours
- Most businesses should be able to access this form of finance, even if the choice of providers might be restricted for smaller businesses that might issue fewer invoices, or for businesses that have only been trading for a few months
- The lender will advance funds against your unpaid invoices, and you shouldn’t have to provide any business assets as additional security
However, there are also a few reasons why invoice finance might not be appropriate for every business:
- It can be difficult to exit an invoice finance arrangement as if you did decide to terminate it, you would then suddenly revert to a situation where you have to wait for customers to settle their invoices, and all of your old cash flow worries could then return almost overnight
- Profits will be affected for as long as the invoice finance agreement is in place, as the lender will take a percentage of every invoice amount as their fee
- Invoice finance can only be used for one reason – to make cash flow more predictable. Other forms of business finance are more flexible and can provide you with funds you can use to grow your business, e.g., to recruit new staff, develop new menus, or refurbish your restaurant
- If you choose a factoring arrangement, your customers will certainly be aware that such an arrangement is in place, as the finance provider will chase up unpaid invoices on your behalf. This could harm your relationship with these customers
Try out the Funding Bay invoice finance calculator to get an estimate of how much invoice finance would cost your business.
Funding Bay can help you obtain the right invoice financing arrangement for your restaurant. We have access to a large number of providers, so get in touch with us today.
