Funding Bay Blog

Should I use Invoice Finance for my Small Business?

Invoice financing is being seen by many small businesses as a way to free up capital from their accounts receivable, but is it worth the costs? 

Cash is king in the small business world – now more so than ever. We live in an economy which is coming under attack from all sides. Having just survived the turmoil of Brexit and the trauma of the pandemic businesses are now dealing with spiralling inflation, supply chain problems and a political situation so uncertain that ‘is the world going to end’ is now one of the more popular Google searches. 

Times, then, are tough which makes the usual challenges businesses have with cashflow even more severe than usual. A cash flow crisis can happen to even those businesses which seem to be in rude health. The gap between delivering services and getting paid is painful and can leave some businesses starring down the barrel. Late payments are estimated to cost small businesses $3 trillion a year globally.   

What is invoice financing?

Such figures explain why many businesses are turning to invoice financing. Even so, many businesses are not fully aware what it is and what it entails. A survey from the British Business Bank found that 45% of small business owners had no idea what it is.  

In simple terms, invoice financing – as the name implies – involves borrowing money against the value of your invoices. In a world in which many businesses are still working on invoice terms as long as 60 or 90 days, this is a way to get instant access to money cooped up in your invoices. You will sign over some or all of the money in the invoice over to the invoice financing firm. They will handle the task of chasing the money and making sure the invoice is paid.

Once this is paid, they will subtract the amount you borrowed, plus their fee and return any remaining money to you. 

It comes in various forms. Some firms will run an ongoing service in which they routinely take on responsibility for all your invoices while others will operate on a more ad-hoc basis, allowing you to pick and choose which invoices you want to secure financing on.

What are the benefits of invoice financing?

There are many benefits to invoice financing. 

  1. Bridge a cash flow crisis: You can close the gap between your bank account and the money owed. By freeing up more of the money in your invoices, you get the cash now which can avoid a short-term funding crisis which could threaten the viability of your business. 
  2. It’s more accessible: Securing conventional finance has become increasingly difficult for small businesses. Invoice financing is easier. Rather than focusing on your credit rating, they will look at the credit histories of your customers. They, after all, will be the ones who are paying the money back. 
  3. Flexibility: The cash can be used for any purpose. For example, having money available now can free up investment to stimulate growth. 
  4. Reduced hassle: If the invoice financing company takes on responsibility for chasing invoices, they will take a substantial burden off your shoulders. Small businesses spend a lot of time, money and energy chasing invoices which should already be in their accounts. This frees staff up to concentrate on more profitable tasks. 

What are the downsides of invoice financing? 

Not everything, though, will be plain sailing. Passing invoices on to a company to chase may affect your reputation with your clients. They will know you’re using invoice finance, which may send out a signal that your business is not on such a stable footing. If your customer is less than scrupulous, they may hold on to see if you go bust before they have to pay up. 

It also costs money. The downside of a low barrier to entry is that the fees can be quite high. You’ll be waving goodbye to a large chunk of every invoice. If you’re doing this routinely, that will be a significant portion of your annual revenue lost due to your use of invoice finance. 

Furthermore, if the credit rating of your customers is not that great, the finance provider may refuse to work with them which could limit the number of companies you can work with. That said, if they don’t have a good track record of payment, they might not be good to work with in any case.  

Choosing your invoice finance provider

For all these limitations, though, invoice finance can be a way out of a difficult situation, or it can help you to use your money more comfortably. Whatever your needs, though, it pays to research the market and make sure you’re going with a reputable provider. Get in touch with one of our professionals at Funding Bay today.

Invoice Finance Calculator

Our Invoice Finance Calculator is easy to use and takes just seconds to learn how much it will cost you to free up your future cashflow.

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