What is Invoice financing?
Invoice financing is a way for your business to get a quick injection of cash by unlocking money caught up in your invoices. It works by sending invoices to an invoice finance provider who will then pay a percentage of these costs upfront. This means your business is essentially borrowing money that is already owed to the business. In some cases payment chasing then becomes the responsibility of the invoice finance provider or it can remain with your company. Unlike other financing options, invoice financing does not involve monthly payments nor does it come with a risk of debt.
Here’s another way of thinking about invoice financing for your business:
Invoice Finance provides funding against the amount due on invoices that a business has issued to its customers. For many businesses the unpaid invoices on their sales ledger represents their biggest asset. Invoice finance is available to sole traders, partnerships, LLP’s, limited companies and Plc’s. The company should be a UK registered company, selling B2B and invoicing in arrears for the services they provide. Invoice Finance cannot fund invoices to private individuals.
How does invoice financing work?
Invoice financing uses your customers unpaid invoices to represent money that will be paid to your business. Lenders will then advance these payments and sometimes even take over responsibility of payment chasing. Invoice financing differs from a loan because you are fast tracking the access to money that your business does already own. This low risk financing option comes without the worry of debt which is why it is a very appealing and beneficial option for businesses of all sizes.
An Invoice Finance provider will enter in to an agreement with a business (typically for a minimum period of 12 months). The Invoice Finance provider will advance an agreed prepayment percentage against the gross value of all the invoices that a company raises to its customers. This prepayment is determined by the nature of the business, its customers, the sector it operates in and the strength of the paperwork to support the invoice. The invoice finance provider can also “take on” the existing outstanding invoices and provide the funding against these too;.
What is invoice financing good for?
Late invoice payments are a notorious problem for businesses. If your business struggles with this then invoice financing is a great option to help solve cash flow issues. Quicker cash injection can help you focus on growth and choosing a lender who also takes on the responsibility of the repayment chasing can free up a lot of your time. Invoice financing comes with less risk than other loans because you are accessing money that is already yours. Invoice financing is suitable for companies needing to increase their cash flow without taking on more debt or liabilities.
Which sectors are good for invoice finance?
- Vehicle Hire
- Contract Cleaning
Some invoice finance companies are able to offer invoice finance to new start/small businesses whereas others will stipulate a minimum client size.
Which sectors are not compatible with invoice finance?
The main industry that cannot be funded by invoice finance is construction. This is because construction businesses tend to raise “applications for payment” and not invoices. These are also subject to valuations, interpretations, JCT/CIS/Retention deductions and can extremely contractual. Collection and enforcement of the invoicing can be challenging.
Why should I consider invoice financing?
Invoice financing can be a really effective and low risk way of allowing your business to fund its growth without taking on more debt or liabilities. Invoice financing is not taking on more debt or payments unlike other financing options. Parkins Finance are here to help businesses in Scotland decide if and how you can use financing options to benefit your finances. Invoice financing is a simple and reliable option for a lot of companies in Scotland and the experts at Parkins Finance are here to advise you on how this can work for you. Our expert financial brokers will work with you to find out what is best for your individual situation and needs.
An Example of Invoice finance
A Haulage business with a turnover of £1.2million (£100k a month) enters in to an Invoice Finance facility. A prepayment 85% has been agreed.
- On day 1 the outstanding invoices (sales ledger) stands at £200k.
- The invoice finance company will advance £170k (85%) to the business.
- The invoice finance company will then provide ongoing prepayment of 85% against all new invoices raised in the future.
- The customers make payment of their supplier invoice directly to the invoice finance company.
- The invoice finance company will then pay the balance of the prepayment (in this example 15%) to the haulage business – less the fees for the facility.
- This relationship continues, often for several years.
The main benefit of invoice finance is that it smooths out cashflow peaks and troughs and frees up the money tied up in the sales ledger. This can often result in better settlement discounts with their suppliers.
What are the different types of invoice finance?
There are three main types of invoice finance;
This provides both funding and sales ledger management services. In addition to funding the invoicing, the invoice finance company will act as the collections department for their client by sending customer statements and chasing invoices with credit control. This is a fully disclosed facility and all parties are aware of the invoice finance company. This is the most expensive form of invoice finance as the invoice finance provider has the cost of chasing the customers.
This stands for Client Handles Own Credit Control Systems. It is the same as Full Factoring but the invoice finance company does not chase the customers, this stays with the client. This is a cheaper option.
Confidential Invoice Discounting
This is a “funding only” service from an invoice finance company. It is completely confidential and the invoice finance company never makes contact with the customers. This is the cheapest form of invoice finance but tends to be reserved for larger businesses who have their own in house accounts department.
As standard, an invoice finance company will look to take a debenture and personal guarantee/fraud warranty from the directors. The risk of non-payment of an invoice will remain with the business and not the invoice finance company.
Insuring the sales ledger
All invoice finance facilities have the added option of including debtor protection. This additional product provides cover should a customer go bust. In this scenario the debtor protection will pay out and settle the invoice.
How much does Invoice Finance cost?
This is very difficult to say as each invoice finance facility is structured differently. The average service fee for an invoice finance client is around £5k to £10k per year.
There are two core invoice finance fees;
Service fee – this is a percentage fee that is levied against the gross value of all invoices.
Discount rate – this is an “interest” type fee that is calculated against the utilisation of the facility.