Invoice Finance

If your business does a lot of commercial work and issues regular invoices, then invoice finance could be a great fit. It’s one of the simplest ways to get cash into your business by releasing funds that are currently tied up in other jobs and invoices.

What is invoice finance?

Invoice finance is a tool of borrowing money, backed by what your customers currently owe your business. Normally, invoices issued on long payment terms sit on your desk or in your accounting software, gathering dust until your business is paid. But with invoice finance, you can take advantage of that cash immediately, and make critical reinvestments into the business.

So instead of sitting there, counting down the days until you get paid, wondering how you’re going to juggle cash for the next project, you can have your money in just days, rather than weeks or months.

How does invoice finance work?

It’s easiest to explain invoice finance with a simple example. Let’s take Dave. Dave run’s a contracting business that’s growing fast. He’s taking on more and more new clients and is owed a good amount of money.

Dave’s just been approached by a client to start another new project, and it’s going to require him to buy a lot of materials and supplies upfront, and when the jobs started he’ll be paying his subcontractors weekly.

Dave has deployed most of his cash on previous projects, and is expecting a £30,000 invoice to be paid in 45 days. Rather than wait 45 days to start the project, Dave decides to use invoice finance, and gets a deal where he receives 80% of the invoice upfront, and the fees are 2.5%.

Once Dave sends the invoice finance lender his invoice, he receives £24,000. Then, once his customer pays the invoice back to the invoice finance lender, Dave receives £5,250. The invoice finance company keeps the £750 as their fee.

These are the basic principles of invoice finance, and there’s a variety of different facilities available.

Different types of invoice finance

The three main types of invoice finance are:

  • Invoice factoring
  • Invoice discounting
  • Selective invoice finance

Each type has its own benefits and drawbacks, but the main things to consider are how much control you want and how much involvement you want the lender to have.

Invoice Factoring

Factoring is the product most commonly associated with invoice finance. The lender has the highest level of involvement and will support your business with credit control to make sure your invoices are paid on time.

For some businesses, this is great, particularly if you’re smaller and don’t have the budget to hire an in-house credit control specialist. Before taking on a factoring facility, it’s important to consider how your customers may feel about a third party collecting your invoices.

It’s important to note that your customers will know you’re using factoring, however if you’re a smaller or newer business, it can be easier to secure than other types of finance.

Invoice Discounting

Better suited to more established businesses, invoice discounting offers a more hands-on facility, typically leaving credit control and collections up the business. Some will require strong internal credit control processes and minimal overdue debt.

Invoice discounting can be confidential, depending on the risk profile of your business and the profiles of your customers.

Single invoice finance and selective invoice finance

If your business is seasonal, or you have very specific pinch points in your business that require cash injections, selective invoice finance can work really well. Selective and single invoice finance give you the freedom to pick and choose which invoices you’d like to fund and which you’d prefer to wait for. Due to the nature of the facility, the per invoice cost tends to be a little higher than the factoring and discounting as you could finance just one or two invoices and never use the facility again.

Used correctly, this is a great tool for a growing, well-organised business. It’s typically harder to secure that factoring and discounting, so your clients need to have strong credit profiles.

Anything else I should know about invoice finance?

The sector your business is in can affect how much you can draw down (borrow) from what’s owed to you. In construction, you’re more likely to get a confidential facility, however that facility will likely be capped at around 50% of uncertified applications (though can range anywhere from 40-65%). The lender will likely want to get their own QS involved to check out your contracts to see if they stack up and while the facility will be confidential, they will probably call your clients QS posing as an auditor to check projects are going to plan.

If you think invoice finance is right for your business, or you’re looking at other forms of finance too, why not compare your options now?

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