As a start-up business, you are at a significant disadvantage compared with your established competitors when it comes to raising operating finance. Nobody knows you, who you are and what your financial track record is – because you don’t have one yet. That paucity of detail is anathema to conventional financial houses.
At What Stage Does Invoice Finance Become A Valid Option?
Let us make one thing clear from the outset. Invoice finance is not seed capital or equity finance. Your start-up must already be in production and actively trading. It must have attracted whatever capital is required to begin trading. So now you have found at least one client, you have delivered a completed proposition to that client, and you have issued your first invoice, which is for a reasonably substantial sum.
The Magic Of Invoice Finance
In the normal course of events, you would wait to be paid by your client who is now your debtor. How long that takes depends on whether or not you negotiated the payment terms in advance and perhaps how good (or bad) a payer that organisation is. This is where invoice finance swings into action to provide some remarkable benefits.
How Invoice Finance Works
The essential element of invoice finance is that a specialist finance provider known as an Invoice Factor will be willing to forward up to 90% of the invoice value immediately. While a bank would look at your personal financial standing and credit track record as well as that of your fledgling start-up, the invoice factor service is most interested in the payment capability of your client.
You simply “assign” the invoice to the service provider, and watch the funds arrive in your bank account often within 24 hours. The factor then deals with the client company and receives payment from them in due course. Then the balance of the invoice value is paid to you, less the agreed fee for the factoring service. There are two types of service: invoice discounting and invoice factoring which are explained in more detail in this article.
How Invoice Financing Differs From Equity Finance
When external capital is invested in your start-up, whether it’s by you, your family and friends, or by a professional investor, it is treated as a balance sheet item. In the world of double accounting bookkeeping, the asset (investment) that is now owned by your start-up is balanced by a liability owed to the investor, which is usually equity but could also be a short term loan and appears on the company’s books. By contrast, invoice finance is a trading transaction that appears only on your Profit & Loss account. This means that it doesn’t appear anywhere as a debt.
Next steps to obtaining invoice finance
Many start-ups are understandably cash starved and find the benefits of invoice finance solves cashflow problems very quickly. Download our free Guide To Invoice Financing, Factoring & Invoice Discounting, which tells you everything you need to know and where to start.