Is invoice financing right for you?

posted by 7 years ago in Guide

How do you qualify?

Invoice finance is for businesses who bill business to business (B2B). These lenders are more likely to lend to businesses who are financially stable but have a cash flow issue or need money for growth. An invoice finance lender is more likely to offer funds to a business than an unsecured lender as they have security in the outstanding invoice.

What are your options?

When looking for finance your options are diverse see options below:

Options What it takes to apply
Invoice financeFor businesses who bill other businesses (B2B). They will take security against your outstanding invoices and may take over the collection of payments from your business.Usual cost: 16-25% annualised
Working Capital/Short term A loan that increases your cash flow and paid back within 3-10 months. Every business can apply for a quick cash advance, but it can be very beneficial for seasonal businesses. The process can be quick but also expensive compared with other options.Usual Cost: 20-60%  annualised
Overdraft Banks offer businesses overdrafts, although your business or directors will need show a good credit rating.Usual Cost: 10-25%  annualised
Start-up loansYou must be at least 18 to apply for a loan, and you will also need a strong business plan to show what the loan is for. If you have been trading for over a year you cannot apply.Usual Cost: 6% annualised
Merchant fundingUsually small businesses use this form of funding because it is short term regular payments paid usually on each business day (under two years).Usual cost: 30-60% annualised
Unsecured loansLike a standard retail loan with fixed monthly payments.Usual Cost:  7-20% annualised

Who uses invoice finance?

Most businesses need a consistent cash flow to grow and run smoothly- this can be supported via invoice financing.

Examples of why businesses will apply for invoice finance:

  • Businesses that want to expand
  • Businesses that want to rebrand and move
  • Purchases (present and future orders)
  • Avoid delay in business performance and production

Positives of invoice financing

  • Improves cash flow almost instantly, you will have the cash as soon as the orders are invoiced
  • Access to an unlimited supply of cash that increases as your sales grow
  • They will manage your books with a professional team to collect your payments.
  • Benefits financial planning as you have access to a credit line when you need it.
  • Having the option of using the cash to improve your business by investing in new technology for example.
  • Invoice allows flexibility when applying for other forms of funding
  • Possible protection for your business from poor debts (only for non-recourse factoring)

Negatives of invoice financing

  • The lender will decide on the credit terms for your buyers
  • Ending the agreement can be complex
  • They can take control of the collections so they could dispute your current relationships.
  • If you chose to factor your invoices you are responsible for collecting the debt.
  • It can be more expensive than other finance options (see what are your options)