Cash flow is a major concern for most companies, and unpaid invoices can lead to financial problems and even insolvency. Invoice financing can remove the headache whilst freeing up capital.
What Is Invoice Financing?
Invoice financing is a way of releasing capital tied up in unpaid invoices. There are two main methods:
1. Selling invoices to a third party
2. Achieving an asset based loan
This article focuses upon the first method. You may also hear the terms ‘receivables finance’, ‘accounts receivables finance’, ‘invoice factoring’, and ‘invoice discounting’. These are all forms of invoice financing.
How Does Invoice Financing Work?
Factoring companies will buy invoices, absorb the risk and often will also take on the credit control responsibilities. Rather than waiting the usual 30 days for payment, the funds are made immediately available to the seller, minus the transaction fee. In most cases, 75-85% of the invoice is released, with the remaining percentage being delivered once the client has paid.
By utilising facilities such as these the working capital (day-to-day cash flow) of a company is improved. This can cover crucial expenses including payroll, VAT and upfront supplier expenses.
This produces a predictable flow of finance, which can be helpful during times of expansion, change or turbulence. It can also be a sensible long-term organisational strategy for some businesses because it reduces the need for other types of finance, such as overdrafts.
What Are The Benefits?
Invoice financing is different from traditional loans. An invoice is an asset, which means that it can be easily – and safely – sold. It is a predictable and comfortable way of guaranteeing finance.
As such, invoice financing is particularly attractive to businesses that may not have a large number of physical assets, or that have not accrued a lengthy credit history.
Importantly, as your business grows, the more invoices you raise and therefore this style of facility grows with you unlike fixed overdrafts or loans.
How Does It Work?
There are two ways that invoices can be released.
1. A third party buys the invoice, and is responsible for securing the payment.
2. A third party buys the invoice, and the seller chases the payment.
Some organisations prefer the first option because it removes the time-consuming burden of invoice chasing. However, the second option can be helpful when the client relationship is important. Although the majority of SMEs will use invoice financing at some point, some prefer not to publicise the fact, and others prefer not to potentially tarnish customer relationships by having a third party pursue an invoice.
What’s The Catch?
In exchange for taking on the financial risk, the invoice purchaser will charge a fee. This is usually small - as long as the debtor has a reasonable credit status. Risk criteria depends upon several variables, including past performance. As long as the debtor is likely to pay the invoice, invoice financing can be a secure method of quickly releasing funds within a predictable timescale.
At Business Finance Solutions Ltd, we work with industry specialists in order to secure the best invoice finance deals for each business. We understand that small businesses are particularly vulnerable to financial insecurity, and work tirelessly to ensure that as many options as possible are open.
For more information, simply give us a call on 0345 50 50 888. You can also download our detailed free Guide To Invoice Financing, Factoring, And Invoice Discounting by clicking here.