Invoice Finance can help you get cash owed to you faster than your clients prefer to pay.
With options including funders collecting the debt for you or you keeping the facility confidential, we can help your business cashflow.
Invoice Finance Guide
What Is Invoice Finance?
Invoice Finance is a way to bring payment from customers forward, so you don’t have to wait weeks, or even months for them to pay.
It can be a fast and convenient way for businesses, large and small, to speed up payment for work or products supplied.
There are three types of Invoice Finance which are; Invoice Discounting, Invoice Factoring and Selective Invoice Finance.
How Does Invoice Finance Work?
A funder will effectively buy your invoices from you, at a discounted rate, so you don’t have to wait for your customers to pay. The invoice terms don’t change for your customers, in fact, they don’t have to know you are using it and you get up to 95% of the invoice value right away.
With Invoice Discounting you will collect the outstanding invoice, Invoice Factoring is where the lender takes over the collection, leaving you to run your business without worrying about being paid.
You invoice your customers as usual then send the invoice details to the funder.
You will receive the first payment right away, up to 95% of the invoice value.
You then collect the invoice as usual if you chose Invoice Discounting, or hand over control to the funder in the case of Invoice Factoring.
When the customer pays, you get the final instalment, minus any funder fees and charges.
What Are The Typical Costs?
The typical cost of this type of business finance varies depending on the method of invoice finance you are taking.
Invoice Discounting will be something like 1.5 – 3% above bank base rate plus a management fee of 0.2 – 0.5% of turnover, whilst Invoice Factoring will cost something between 1.5 – 5% of the value of an invoice.
The Different Types Of Invoice Finance
Here are the three Invoice Finance types – Invoice Discounting, Invoice Factoring and Selective Invoice Finance.
With this method, you can get instant access to up to 95% of your outstanding invoices. For some businesses it is important to them that their clients don’t know they are using finance, Invoice Discounting is confidential so they won’t know.
You will be responsible for collecting the payments for the funder.
You can get similar percentages of the outstanding invoices but it works in a different way. You are selling the invoices to a funder for an agreed amount.
Unlike Invoice Discounting, you are not responsible for collecting the payment. This passes over to the funder who will have an in house team to do it for them.
The advantage here is you are free to concentrate on your business. It’s worth keeping in mind that the funder likely won’t collect invoices in your name, so your customers will know you have a finance agreement in place.
Selective Invoice Finance
Selective Invoice Finance can also be known as Spot Finance or Single Invoice Finance. In this case, your business would sell a single invoice to a funder to release the funds tied up in it.
Whereas with Invoice Discounting and Invoice Factoring, you sell all your invoices, this allows you to select a single invoice to sell to the funder. It works similar to Invoice Discounting in that you will be responsible for getting the payment in, rather than relying on the lender to do it for you
What Is The Difference Between Discounting And Invoice Factoring?
Though they are similar, there are a couple of crucial differences that may make one more attractive for you than the other.
Both will allow you to raise up to 95% of your invoices quickly, so you don’t have to wait for your customer to pay you to get the cash.
With Invoice Discounting, you remain in control and will collect the payment for your funder. It remains confidential and your client need never know you are using a finance facility.
With Invoice Factoring, you will lose that confidentiality. The funder will use their own staff and systems to collect the debt for you. Most don’t “white label” so your customer will know you have sold the debt on.
That is not necessarily an issue, though, as tens of thousands of businesses use invoice facilities so it is by no means uncommon.
What Are Non Recourse And Recourse Invoice Finance?
Non-recourse invoice finance – Gives you safeguards against bad or late payments of the customers’ debt to you.
You won’t be held liable for customer non-payment, the funder will take on the bad debt.
Recourse invoice finance – Means you don’t have that bad debt protection. If a customer fails to pay, for whatever reason, you and your business will still be liable to pay the funder.
What Are The Advantages of Invoice Finance?
You can take advantage of the fast and flexible cashflow management that Invoice Finance can offer.
Get up to 95% of invoice value – It will vary between funders and businesses but you can get up to 95% of the money tied up in your invoices right away.
Fast finance – It can be a very quick and easy way to get paid. Once the facility is set up, it’s not uncommon to have funds in your account within 24 hours of an invoice being submitted.
Improves cashflow – Not having to wait weeks or months to be paid by customers can be a great help for your business cash flow.
Confidential service – Using Invoice Discounting means you stay in charge of the invoice and collect the payments, your customers won’t know you’ve used finance.
No need to chase payments – Or you can use Invoice Factoring where the debt is chased for you, leaving you free time to run your business.
Sell one invoice or all of them – With Spot Financing or Selective Invoice Finance, you can sell individual invoices rather than all of them.
Disadvantages Of Invoice Finance
Customers may know you’ve taken finance – If you go down the route of Invoice Factoring, your customers will know you are using finance which may make them think differently about your and your business, altering your previously good relationship.
It’s only suitable for some businesses – If you trade to the general public (B2C), this sort of finance won’t work. It’s designed to be used by businesses (B2B), i.e. a business that sells their products and services to other businesses.
Does My Business Qualify?
To be eligible for Invoice Finance, you need to be working business to business, invoicing them for work done, or products sold. You must also be U.K. based, with a minimum turnover of £100,000 and a trading history of at least 4 months.
Some Industries That Use Invoice Finance
Several sectors are able to make use and benefit from Invoice Finance, here are a few examples:
Construction Industry Finance
Construction Industry Finance gives you access to cash you may have locked in a contract. Many construction businesses and contractors need to access money to be able to pay ongoing costs.
Construction Industry Finance can be used for several reasons:
To cover payroll
To pay suppliers
Go to our Construction Industry Finance page for more detailed information.
Invoice Finance For Design And Marketing Agencies
The design industry suffers from it’s fair share of slow and late paying clients. Advertising agencies, web design agencies and design and marketing companies are all prone to the cashflow issues this can bring. Whether you are a freelancer or a larger agency with the overheads that come with it, you don’t have to suffer.
With staff to pay, office overheads such as printers and rent to pay, it can be a challenge paying the bills when clients have not paid what’s due – you still have to pay for light, heat and hosting.
Invoice Finance could be useful for you. If you “sold” an invoice to a funder you could receive up to 95% of the amount of the invoice within a few days, helping you keep trading while you wait for payment.
You could use Invoice Discounting where you are still the client contact for payment, or you could take on Invoice Factoring where the funder does the chasing for you.
Invoice Finance For Manufacturing and Engineering Companies
Cashflow is needed to make sure you can pay your suppliers on time so you don’t have to halt work and production. Having the money coming in can be the difference between a successful business and a struggling one.
To get over the issue of clients, large and small being slow to pay, you can use Invoice Discounting or Invoice Factoring. For a larger invoice, you might want to take advantage of Selective Invoice Finance.
As with other industries, you can have options where the funder takes over the debt for you, or you can keep the arrangement confidential and chase the debt yourself.
We have a panel of lenders who understand the financial needs of your industry and business and can tailor facilities that suit your current needs.
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