Invoice finance

Invoice Finance – A Business Loan That Settles Itself

To run a successful business, you need to have a brilliant idea, a wonderful plan to execute it and the skills to make everything work for you. But that’s not enough! The most important metric to judge the success of a business is its profitability. And, your business is profitable only as long as the money keeps coming in from the products or services you sell.

It’s a common practice, especially in industries where heavy-duty goods are bought and sold, for buyers to take weeks – if not months – to settle their invoices. It’s not always possible for you, as a supplier, to charge late fees or deny credit to your long-time customers. Unpaid invoices, however, end up hurting the cashflow calculations of the supplier – sometimes, to an irreparable degree. If your business finds itself in such a situation, an invoice finance package can be an option worth exploring.

What is Invoice Finance?

Invoice finance is a niche business loan that makes funds available to the borrower against the buyer-approved invoices that are due.

For most commercial trades within the UK, it’s commonplace for the supplier to allow the buyer a period of 7 business days or longer to settle their invoices. For a number of reasons, from bank holidays to shipping delays, settling of invoices can take longer than you would expect. At times, you may come across an important but particularly difficult customer who will always pay, but rarely on schedule.

All these things, when put together, mean that despite registering sales, your business may not always have the luxury of strong, positive cashflow. Invoice finance provides a workable solution to this problem by helping you ‘cash out’ your confirmed invoices. A practical example will further clarify this concept.

Example:

Let’s consider the example of a commercial printing business. The business, in operation for over 5 years, has managed to win a satisfactory number of regular customers. Since the operations are strictly business-to-business, the invoices for delivered services usually take up to 30 days to settle. The business has an urgent need for cash to pay for the deposit of new, advanced machinery they intend to buy. To be able to do this, the business decides to involve an invoice discounting financier to free up these invoices. The financier pays upfront for the total sum of all the unpaid invoices, with deductions made for the interest and processing fees. The business can now easily afford to repay the loan over six months, in affordable, monthly instalments.

Features & Benefits of Invoice Finance

The most prominent features and benefits of invoice finance business loans are discussed below:

Ease of Access

Invoice finance packages are among the easiest-to-access business loans available. As far as lenders are concerned, such loans carry very little risk, as the buyer has already received the goods and approved the invoices. So, any business with a decent trade volume can find lenders willing to provide invoice finance to them.

No Additional Security Required

A typical invoice finance package, unlike other types of business loans, is already backed by the trade agreement between the buyer and the seller. So, in most cases, invoice finance doesn’t require you to put up an asset as collateral.

Fast Processing

Once your invoice finance application is approved by the lender, it takes no longer than 3-5 business days for you to receive the funds. The paperwork involved in the process is minimal, further speeding up the proceedings.

Available Despite Bad Credit

Invoice finance packages are standalone packages that don’t concern themselves with neither the credit score of your business nor the potential for growth. Therefore, lenders don’t overly depend on the credit history of your business while assessing your invoice finance application.

Flexible Repayment Options

If you go for invoice discounting (please read on for more details), you can choose suitable short-term periods to repay the loan. Most lenders, for sizeable loan amounts, allow for up to 12 months for repayment.

Expertise

Wherever possible, we make sure that we bring on board lenders with great experience and expertise in your field of operation. We have always found that businesses, especially young ones, benefit immensely from such partnerships.

Types of Invoice Finance

There are two major types of invoice finance – invoice factoring and invoice discounting. While similar in concept, both these types drastically differ in their features.

Invoice Factoring

Invoice factoring is a type of invoice finance in which the business (the borrower) ‘outsources’ their sales ledger to an external financier. The financier, for all practical purposes, takes over the sales of the business. Collecting the dues from the customers becomes the full responsibility of the financier in such cases. As a result of this added responsibility, invoice factoring usually costs the borrower more than invoice discounting.

Invoice factoring is suitable for businesses with large sales volumes and no debt collection infrastructure. The most significant advantage of invoice factoring, for the borrowing business, is that they always have an immediate access to capital, as long as they register sales. On the other hand, customers may not always find the idea of dealing with a third-party financier appealing. Since the financier is responsible for collecting the monies owed, the borrower never really has to worry about the repayment schedule, after paying the interest and fees upfront.

Invoice Discounting

Invoice discounting is the most widely used type of invoice finance. When a business gets an invoice discounting loan, the lender assesses the sales profile, the available invoices and the repayment potential of the business. A fixed percentage – as high as up to 95% – of the cumulative invoice amount is offered to the business as a short-term loan. The business never loses the control on their sales ledger in this case. Hence, the business is always responsible for collecting the dues from their customers.

An advantage of invoice discounting is that your customers will never have to deal with the lender. On the other hand, your business will have to invest in debt collection infrastructure to make sure that the unpaid invoices get settled reasonably quickly.