The absolute beginner’s guide to invoice finance

01/11/2016

Invoice finance is rapidly increasing in popularity as more and more businesses realise the benefits of unlocking the working capital tied up in their sales ledger.

But what is invoice finance, how does it work and who could benefit from utilising this funding option?

Our absolute beginner’s guide to invoice finance aims to answer all of these questions and more.

We hope you find it useful.

What is invoice finance?

Invoice finance is a flexible funding solution which releases cash otherwise tied up in outstanding customer invoices, allowing businesses to bridge the cash flow gap commonly associated with trading on credit terms.

Typically, through invoice finance you will be able to release up to 90% of an invoice’s value within 24 hours of its issue.

Then, once the customer has made payment, the remaining balance is paid to you, minus fees.

Whilst there are numerous variations of invoice finance, the two most common solutions are invoice discounting and factoring.

How does invoice finance work?

Whilst different variations of invoice finance work in slightly different ways the main process remains the same:

1. Your business raises an invoice
2. Funder advances up to 90% of its value within 24 hours
3. Payment is collected from the customer
4. The remainder of the invoice value is made available, less fees

These diagrams look in more detail at how the process works for both invoice discounting and factoring. 

What is the difference between invoice discounting and factoring?

Invoice discounting and factoring both aim to boost your cash flow by releasing working capital from your invoices.

The main difference between them is that factoring also comes with a dedicated sales ledger management service.

The credit control expertise this brings can help to reduce in-house overheads and improve collection times.

This makes factoring particularly useful for smaller businesses, whose resource would be better spent on core activities.

In contrast, with invoice discounting you keep your credit control function in-house and continue to be responsible for collecting payments.

Both products can additionally incorporate bad debt protection to safeguard your cash flow against late payment and protracted default.

For a more detailed comparison of the two options take a look at this free download. 

Can my business use invoice finance?

Although invoice finance is better suited to certain industry sectors, if your business is B2B and trades on credit terms you should be suited to this method of funding.

What are the benefits of invoice finance?

There are so many reasons businesses are increasingly turning to invoice finance. Here are just a few:

• Quick cash flow boost
• Bridges the cash flow gap between paying suppliers and getting paid
• More flexible than other types of funding, as the amount you can access grows with your sales ledger
• Good for businesses with limited trading history
• Can include additional services such as credit control and debtor protection
• Cannot be recalled on demand
• Can be tailored to suit the individual needs of your business. For example, you can raise funding against single invoices rather than your entire sales ledger

Are there any negatives?

As with all funding products, invoice finance is not a one-size-fits-all solution:

• Better suited to certain industry sectors
• Only for B2B and those trading on credit terms
• Creditworthiness of customers is an important consideration

Who offers invoice finance?

A whole host of banks, independent funders and factoring companies offer invoice finance products.

The choice available to businesses has grown substantially in recent years, with new players entering the market and lenders diversifying the different types of products available.

This post looks at the importance of the relationship between a business and its funding partner. 

How can I secure the right invoice finance solution for my business?

With so many lenders and variations of invoice finance to consider, it’s vital that you do your research to ensure that you are getting the most suitable solution for your needs.

However, with lenders often using different structures, fees and terminology, comparing your options can be time-consuming and challenging.

Fortunately, commercial finance brokers can talk you through all of the different options and their benefits to help you find the most suitable solution.

With the help of a broker you can:

• Save valuable time and resource by benefiting from commercial finance expertise
• Navigate the commercial finance market to find facilities that tick all the right boxes
• Access decision makers across a wide range of banks and independent funders
• Secure a funding facility tailored to your needs

For more reasons why working with a broker could help your business read this. 

Still have questions?

If you still have questions about invoice finance, how it works or if your business could benefit, we could help.

As an independent commercial finance broker that specialises in invoice finance, we have extensive knowledge of the product and providers and would be more than happy to discuss any questions you may have.

And, with wider knowledge of the finance market, if invoice finance isn’t the right fit for your business, we can help you identify and secure the funding product most suited to your requirements.

Contact us today on 0800 9774833 or info@hiltonbaird.co.uk to discuss your options with one of our experienced funding consultants.