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Are you aware of what invoice finance is, and the benefits it can bring your SME?

What is invoice finance?

Managing cashflow and invoice payments is one of the most common challenges that small to medium businesses face. Customers that pay invoices late or request generous payment terms, outside the standard, often place a large strain on a business’s bottom line.

Did you know there are finance products accessible to businesses that can help to bridge the gap between when an invoice is issued and when it is paid? One of those products is invoice finance.

Also known as debtor finance, or accounts receivable finance, invoice finance is a flexible, solution that provides businesses with a line of credit, using its unpaid customer invoices as security. It allows businesses the ability to get paid straight away, without having to wait 30, 60 or 90 days to receive payment. Invoice financing can be used to quickly raise capital to pay suppliers, cover overheads and reinvest in growth. It is most often used by businesses to increase cashflow and cover cash shortfalls in the short term. Invoice finance covers invoice-based lending, including invoice discounting, invoice factoring and spot factoring.

Types of invoice financing

There are various types of invoice finance, with the primary difference between each being who is responsible for collecting the unpaid invoices.

Invoice factoring

Invoice factoring involves a business selling a selection of their unpaid invoices to a third-party factoring company. The unpaid invoices are sold at a discount to help free up cashflow. In many cases, businesses can receive up to 95% of the outstanding invoiced amounts upfront.

Collecting payments becomes the responsibility of the factoring company, as they now own the debt. Once all invoices have been paid in full, the factoring company pays you the difference, less their fees and charges.

Selective invoice financing

Selective invoice financing, also known as spot factoring, involves a business choosing which invoices it wants to finance, as opposed to financing all outstanding invoices. With selective invoice financing, all unpaid invoices remain with the business. It is often a good avenue for small to medium businesses with a small number of large value invoices.

Invoice discounting

Invoice discounting allows businesses to access a line of credit through using their unpaid invoices as collateral. Businesses can access up to 80-85% of the total value straight away, receiving the balance, less the lenders fees, on final payment. Typically, this type of invoice financing suits small, medium and large businesses who have a small number of high value clients. Similar to selective invoice financing, the collection of unpaid invoices remains with the business, allowing the financing relationship to remain confidential.

How does invoice finance work?

  1. A business provides goods/ services to customers and immediately invoices for them.
  2. The business sends the invoice details to the chosen invoice financing provider, (the lender).
  3. The business receives a percentage of the total value of the invoiced amount (normally up to 80%), usually within a 48-hour period. The final percentage is dependent on the lenders internal risk criteria.
  4. The business chases and collects payment of the invoices as per normal. Except in the case of invoice factoring, where the factoring company chases and collects payment.
  5. When the invoices are paid, the business settles the line of credit and reimburses the invoice financing lender. As the business, you keep the balance of funds minus the lender’s fees and charges. In the case of invoice factoring, the factoring company pays you back the balance minus the fees.

Advantages and disadvantages of invoice financing

The one main advantage of invoice finance is that it provides businesses with quick access to cash, without having to rely on their own cash reserves to cover late payments. Businesses only access the cash they need, when they need it, avoiding the sometimes slow process of securing a traditional bank loan.

Other advantages of invoice finance include:

Speed

Payment is usually received with 24-48 hours if your business meets the lender’s criteria.

Improved cashflow

Receive payments and boost cashflow quickly without having to wait the normal 30, 60 or 90 day period to receive payment.

Competitiveness

Invoice finance allows you the added option of extending payment terms to your customers, in turn making you more attractive and competitive as a business.

Accelerated growth

Gain access to most of the payments straight away, freeing up cashflow and allowing you to take advantage of other business opportunities.

Improved customer relations

As the responsibility of collecting unpaid invoices stays with you (except in the case of invoice factoring), your business and supplier relationships remain confidential.

Flexible borrowing option

Invoice financing is relatively easy to gain access to with little to no property security normally required.

Tailored borrowing

An invoice finance product is based on the amount of money that is invoiced each day, week, or month and therefore the accessible funds are tailored to the size, and cashflow requirements of each individual business.

The disadvantages of invoice financing

Invoice financing is still a form of borrowing, and therefore comes with associated fees, charges and risks including a business becoming overleveraged.

The main disadvantages of invoice financing are:

Fees and charges

Invoice financing products can be expensive. Normally fees range from 1 to 4% and only cover a portion of the invoice.

Limited protection

In all cases, except invoice factoring, chasing of payment remains your responsibility and therefore there may be no protection against non-payments.

 Non-payment risk

Customers not paying an invoice on time will result in a business being penalised and paying more interest on the amount borrowed. In some instances, if payment is never made, the business will still be required to cover the full invoice amount.

Limited financing

Invoices can only be financed once, as they act as a security over the amount borrowed.

Is invoice finance right for my business?

Invoice finance can be a great solution for small to medium sized businesses, including those who have a small customer base. It also suits businesses who do not have property to use as security, or that meet the usual criteria associated with a traditional business loan.

At Grow, our invoice financing product provides a flexible, stress-free solution that allows businesses early access of unpaid invoice funds, allowing them to cover day to day business costs, salaries and supplier invoices. With no property security required, as long as you have been operational for six months, you can apply for up to 80% of your unpaid invoices. Depending on your requirements, funds will be available to you within 24 hours.

For more information on how to apply for our invoice finance product, contact the team at Grow Finance today.‍




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