Invoice financing is a term which is used to describe a variety of asset-based lending options. A business can sell their invoices to a third party finance company, as a way to improve cash flow. The invoice finance company will charge a fee for their service, however the borrower is able to unlock the cash tied up in overdue invoices.
The business can then use this cash to pay employees, suppliers or even invest in one or more ideas to increase growth. Instead of waiting for an invoice to get paid, invoice finance can be used to instantly improve cash flow.
There are several types of invoice finance available, including factoring and invoice discounting. Each one is designed to provide asset-based finance, so you get instant access to cash without waiting for your customers to pay.
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For many years invoice financing has provided businesses with an alternative form of borrowing. However, it is only in the last few years that businesses have really started to use this form of finance to improve cash flow.
If your business struggles with late paying customers, it is likely your cash flow also struggles. Although some businesses have an effective credit control department, it may not be possible to wait lengthy periods for customers to pay. Every business relies on a healthy cash flow, although it is often small businesses and startups which feel the financial pressure from unpaid invoices quickly.
Another great benefit of invoicing finance is the amount your business can borrow , which increases in line with your turnover.
This often leads to a more flexible form of funding for businesses, in comparison to loans or overdrafts. If your sales are growing it is important that your cash flow maintains pace, which can be difficult if your invoices do not get paid on time. Invoice financing will untie funds within your sales ledger, so that your money works harder for your business.
Depending on the type of financing you opt for, your business could free up time spent chasing late payments. As experienced collectors of debts, they will be able to liaise with your customers to ensure quick and smooth payments, while you concentrate on your business. However, if you prefer to retain control of your accounts receivable, there are options available where you still retain responsibility.
There are many invoice financing companies in operation, from small independent lenders to large high-street banks. For many businesses it can be difficult to borrow traditional business loans, however access to funding could be available through alternative forms of finance. The invoices listed in your sales ledger are considered an asset of your business, so many lenders will provide you with access to larger loan amounts in a faster amount of time.
The invoice finance provider will need to see a copy of your sales ledger, however their decision will also be based on the payment history of your customers. This means that if your business struggles with its own financial history, but has a solid turnover, you could still get approved for invoice financing. Although the lowest interest rates will be offered to those with a solid credit rating.
In 2017 a new trade association was formed, known as UK finance. Their role is to regulate the asset based lending industry, to ensure here in the UK we continue to operate as a global leader in the financial services industry. In the past, invoice finance was regulated by the Asset Based Finance Association and the new association continues to use the existing Standards Framework and independent Complaints Process.
However, it is not a legal requirement for invoice finance providers to be members of this trade association. By obtaining funding from a service which is a member of this trade association, you will benefit from transparent fees and charges.
Here at BusinessComparison we provide you with access to invoice financing companies you can trust. As a broker we have partnered with a range of finance providers which are based in the UK, so you have access to the funding you require. When you arrange invoice finance through our website, all fees will be clearly stated and you will receive transparent terms and conditions. Financiers can be specialist asset based independent lenders, part of a traditional financial institution or a group of individuals.
More than 40,000 UK businesses have borrowed using their invoices at one time or another. There’s no doubt that invoice financing can provide a valuable short term funding opportunity for businesses looking to improve their cash flow and, in many cases, expand their client base. However, despite many similarities, this type of lending is not a case of one size fits all! There are two main routes to this sort of lending and understanding the differences between them is crucial when it comes to getting the right short term borrowing solution for your business.
understanding the differences between them is crucial when it comes to getting the right short term borrowing solution for your business.
The main difference between invoice factoring and discounting is with who takes responsibility for the sales ledger and collecting payment from customers.
There are some basic requirements which your business must meet, to be eligible for invoice financing:
When you apply to the factoring or discounting provider, they will determine the level of risk associated with your business. The risk level will be influenced by your customers history of payments, your relationship with your customers and the industry you operate in.
When businesses sell services of physical goods to customers, often these are sold on credit. This allows customers to get the items or service they need, as long as they pay within an agreed credit term. However, this can mean your business needs to wait a long time for payment, if the customer does not pay within the agreed time frame. Although you may get paid on time, your business will still need to pay for the cost of providing the goods or services before receiving payment, which can leave a temporary shortfall in cash flow.
If you decide to use a form of invoice finance to obtain credit, you will continue to trade and issue invoices to your customers in the usual way. You will then need to provide the invoice financing company with a copy of the invoice. The lender will issue your business with an agreed percentage of the invoice, so your cash flow instantly improves, without waiting for your customers to pay.
Depending on whether you choose invoice discounting or invoice factoring, you may need to continue to chase the unpaid invoice in the usual way. Once your customers pay the invoice, your business will receive any remaining amount minus the agreed fee and borrowed amount.
Invoice purchasing is a form of invoice finance, where the company essentially buys the invoice. The invoicing company takes over the risks and responsibility of chasing the invoice payment. Please click here to see BusinessComparison's invoice purchasing options.
Invoice discounting is another form of invoice finance, which allows businesses to release cash tied up in the sales ledger. Your business remains in control of its credit control procedures, so you will continue to collect payments from late paying customers. Please click here to see BusinessComparison's invoice purchasing options.
A factory company offers a form of invoice finance, where they take responsibility for your credit control processes. They provide you with an agreed percentage of unpaid invoices, then collect payments in full from your customers. Your business will then receive any remaining balance, minus any charges when your customers pay their invoice.
Invoice factoring is not confidential, so your customers will be aware that you are working with an invoice factors company. As a business if you would prefer to maintain confidentially and keep your debtor collection within the business, invoice discounting may be the one to consider.
In a similar way to invoice discounting, invoice factoring provides access to capital which is tied up within invoices. The main difference with factoring company's is that they take control of your credit control and accounts receivable processes.
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Here at BusinessComparison, our aim is to help businesses compare a variety of financial products, from invoice financing to bank accounts and utilities. Our panel of lenders includes a variety of leading invoice financing companies, so you get access to the best terms within our industry leading website. To find out more about invoice finance or any other form of business borrowing, please contact our experienced team today.