Is invoice finance right for my business?

Posted by | June 13, 2018 | Accounting, News | No Comments

When you hear the words “invoice finance”, what springs to mind?

Financial peril? Cash flow problems? Lender of last resort?

It’s true, invoice finance has garnered a reputation as a byword for money troubles, but the truth is it’s now a very popular – and simple – business funding solution.

And if you’re wondering if invoice finance makes sense for your company, you’re in the right place. In this blog post, we explain what it is, its benefits, and when to avoid it.

What is invoice finance?

To keep it simple, invoice finance (or invoice factoring) allows you to get paid on time when you issue an invoice to a customer.

Via a factoring facility, you are paid up to 90% of the invoice amount, and the chasing of the customer is left to the factoring company. Once the invoice is paid, the loan is repaid, and the difference is passed on to you.

Here’s why invoice finance makes sense

If your business offers customers credit terms, you can run into trouble even when profitable. Late payments are a significant challenge for SMEs in the B2B sector, and if it becomes a regular occurrence, you’ll be left staring at a cash flow problem sooner rather than later.

And as we’ve written before, a healthy cash flow is vitally important to the success of any business. Even the largest companies in the world are only ever a cash flow crisis away from crumbling. So, it’s always helpful to understand the funding options available to you before you need them.

Here’s why you should consider invoice finance as a viable funding solution for your business:

Get paid on time, every time 

The major benefit of using invoice finance is that your business will be paid on time and every time you issue an invoice. This allows you to better plan your cash flow and manage your expenses.

What’s more, the factoring company will take up the challenge of chasing your customers for payment, freeing up valuable time that would have otherwise been spent writing emails and playing phone tag with slow payers.

Generally speaking, invoice finance will increase the amount of cash available to your business, and it can do so with a remarkably quick turnaround. Some invoice factoring companies can pay the amount owed in just 24 hours.

Less risk attached

When compared with other funding options, there’s far less risk attached to invoice finance. You are, after all, borrowing against money you’ve already earned. And you won’t have to deal with fixed payment terms as the factoring company will simply collect what’s owed from your customers on your behalf.

That being said, you will usually have to provide a personal guarantee – but invariably these are not very high compared to the amount of finance being provided.

A few things worth considering…

One of the biggest challenges of invoice financing is finding a factoring provider with a track record of conversions, and one that aligns itself well with the needs of your company and understands your industry.

It’s vital that the company you choose shares your approach to customer management, as they will ostensibly represent your business when pursuing payment. You’ll, therefore, want some guarantees as to how they go about this, and insight into their techniques and professionalism.

The last thing you want is for an invoice finance company to intimidate or insult your loyal customers. So, while invoice financing can save you time, you do still need to manage the process and communicate with your customers to ensure they are aware of the situation.

When not to use invoice finance?

Another advantage of invoice finance is that, while there is a fixed service fee attached, the interest is only charged on any advance payments that remain unpaid by your customers. This means that every time a customer pays their bill, your debt to the invoice factor is also repaid.

However, due to the extra cost involved, it’s typically not a good idea to use invoice finance when gross profit margins are low.

Interested in invoice financing? 

We can help. Some of our most profitable clients swear by invoice financing, and we can point you in the direction of an invoice factor that fits with your industry and your business needs.

Contact us today to discuss your business funding options.