Is Invoice Finance right for your business?

Invoice financing is a short-term lending facility which allows you to draw down in advance money which your customers have pledged to pay you in 30, 60 or 90 days time. You show your lender the invoice which your customer has given you and the lender sets up a facility for you to borrow against it. Depending on which option you choose the service can be entirely confidential – your customer won't know that you are borrowing against their future payment. Invoice financing usually allows you to receive up to 90% of the money you're owned within 24 hours of submitting an invoice, giving you the cash flow you need to operate your business effectively.   Is it the right Cash Flow Finance Option for me? There are two types of invoice financing – discounting and factoring. Invoice discounting is available to businesses with a turnover of more than £500,000 but to be eligible for the facility your company must have well-established systems and procedures in credit control and sales ledger management. Smaller businesses – those with a turnover of at least £50,000 – can also borrow against invoices through a process called invoice factoring. The key difference between discounting and factoring is that in the latter case invoices are sold to a third party provider at a reduced rate. Borrowers in effect pay a higher price to access the cash they need. It is nevertheless a valuable financing option for emerging companies. How much you can borrow against your invoice depends on factors including your credit rating, whether your trade is domestic or export led and who your paying customer is. Generally though, the range of funds available is between 60% and 90% of the amount owed to you. What to consider when choosing an invoice discounting provider? Your lender will charge you for providing an invoice discounting facility so ask about charges upfront. Generally, there are two costs – the monthly service fee which the financing company applies regardless of whether or not you use the facility, and the discount rate which is the percentage rate you will pay to borrow the money. Ask your broker to provide you with a sample quote from three different companies so that you can be assured you have sourced the best deal. On top of these charges, most lenders will levy a setup fee. Some lenders choose to charge large setup fees combined with low monthly payment charges, so get out your calculator and work out which facility will cost you more over the medium to long term. Your provider should offer you a bad debt protection option, which means that if your customer goes broke before paying you, the lender will protect you and pay up to 100% of the invoice. Some businesses use invoice financing much like an overdraft – they dip into it when cash flow is tight. For other businesses, invoice financing is an integral part of their business model. In the latter case in particular, think carefully when agreeing a notice period and length of contract on your account. Lenders usually work on a twelve month basis but some lenders do offer rolling arrangements with 28 day notice periods and the option to terminate after 6 months. These also give the lender the option to terminate the agreement so make sure you plan properly and protect yourself and your cash flow. Used correctly, invoice financing can resolve a lot of the headaches associated with running a business. Just ensure that you research all your options and if you;d like to discuss things with us at no obligation, either complete our Invoice Finance enquiry form here or call us on 0845 1260350