What is Invoice Finance and why does it remain popular? 

The thing about common sayings is that they normally contain a central truth. The phrase ‘Cash is King’ demonstrates the importance of keeping cash flowing in business. In real terms, cash is vital to the success of all business, whatever their age, size or nature.

Invoice Finance remains a popular method of financing your business, as it allows you to free up cash that is locked into your outstanding invoices. By releasing this cash, your business can benefit from a cash boost now, rather than when the invoices are settled.

Businesses of all sizes need cash. You might be a small start-up business struggling to free up working capital or perhaps a larger, established firm looking for a cash injection to fund your expansion plans. In essence, if you are trading on credit terms within the business-to-business marketplace you can benefit from Invoice Finance.

There are two main types of Invoice finance – Factoring and Invoice Discounting.

Factoring is ideal for smaller businesses who do not have an established accounts team. It can also benefit business who want a funding and collections service.  As well as providing the finance, the factoring funder will manage your credit control, chasing and collecting outstanding invoice payments on your behalf.

Invoice discounting is a funding-only solution, more suited to businesses with a credit control function in-house. The funder provides the finance, on the strength of your outstanding invoices, but you remain in control of collecting the invoice payments which are due.

What are the key benefits of Invoice Finance?

• Quickly unlocks cash due to the business, it does not involve extra funding or any loss in equity.

• A secure form of finance as the sales ledger is used to secure access to funds.

• Improve your profit – paying your suppliers early lets you buy in larger quantities and take advantage of any volume discounts available.

How Does it Work?

• Send your invoice to your customer and send a copy to the funder.

• With a Factoring facility, the funder will undertake credit control on your behalf, chasing customers until invoices are paid.

• With an Invoice Discounting facility, you take responsibility for chasing payment of the invoice and your customer makes payment into a dedicated business account which is controlled by the funder.

• On receipt of your invoice, the funder will advance an agreed percentage of the invoice value to you, generally within 24 hours.

• Once your customer pays in full, the remaining percentage is returned to you, minus a fee. 

This means that you benefit from a significant proportion of your invoice value being paid now, providing vital cash for your business.

What does Invoice Finance cost?

Fees are based on the level of support needed for your business. When compared with other sources of finance, invoice finance can be a cost-effective way to fund your business.

There is usually a service fee, based on a percentage of your turnover, and a Discount fee (interest on the monies borrowed). It is important to be realistic about your projected turnover when looking at costing a facility. Whilst a higher turnover business may attract a lower turnover percentage, usually the funder will set a “minimum fee” to protect their income so if your turnover drops, you will probably face a top up fee. Some funders have additional fees, known as disbursements. It is important to be aware of when these fees will apply as this could increase the cost of your facility significantly.

What can Invoice Finance save you?

Invoice finance remains popular because you can make savings in several areas.  

• Bank Charges – a regular flow of cash into your account can give you a stronger bank balance, so could save on bank interest and charges.

• Time and Money – if you choose factoring, the funder will chase payments on your behalf, saving you the time and administrative costs involved in chasing invoices yourself. It will also allow you to focus on your core business, rather than chasing outstanding invoices.

• Lost Opportunities – larger orders normally require strong cash flow to fulfil them. Invoice finance can provide the peace of mind and confidence you need to accept new and larger orders.

Many invoice finance providers will insist on taking assignment of your whole turnover and will require you to commit to a contract.

Financiers are also now tailoring their invoice finance offering to specific sectors. For example, they may have a designated team, geared up to deal with Contractual Debt. Some even do add on products, such as a back-office function for recruitment sector companies.

When considering whether Invoice Finance is right for your business it’s important to understand how the facility will work once it’s up and running. The funder will need to validate the invoices, which will involve contacting your customer or requesting supporting documentation. The funder may also require ongoing access to financial information such as Financial Accounts and/or bank statements.

At Resolute Commercial Finance, we can explain the process and search the market on your behalf to get the best facility for your business.

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