What is Invoice Finance?

Whether you are a small start-up business struggling with working capital or larger organisation looking for a cash injection to fund expansion plans, if you are trading on credit terms within the business to business marketplace you can benefit from Invoice Finance.

Invoice finance takes two main forms - Factoring and Invoice Discounting.

Factoring is ideal for smaller businesses without an established accounts team or those who want the benefits of a funding and collections service.  As well as providing the finance, the funder will manage your credit control, chasing and collecting outstanding invoice payments on your behalf.

Invoice discounting is a funding-only solution, more suited to businesses with a credit control function in-house. The funder provides the finance, but you remain in control of collecting payments.

Key Benefits

  • Quickly unlocks cash due to the business, not extra funding or loss in equity
  • A secure form of finance as the sales ledger is used to secure access to funds
  • Improve your profit - Paying suppliers early lets you buy in larger quantities and take advantage of any volume discounts available.

How Does it Work?

  • Send your invoice to your customer and send a copy to the funder
  • With a Factoring facility, the funder will undertake credit control on your behalf, chasing customers until invoices are paid
  • With an Invoice Discounting facility, you chase payment of the invoice and your customer makes payment into a dedicated business account which is controlled by the funder
  • On receipt of your invoice, the funder will advance an agreed percentage of the invoice value to you, generally within 24 hours
  • Once your customer pays in full, the remaining percentage is returned to you, minus a fee

What it costs:

Fees are based on the level of support required and when compared with other sources of finance, invoice finance can be a cost-effective way to fund your business. There is usually a service fee based on a percentage of your turnover and a Discount fee (interest on the monies borrowed). It is important to be realistic with regards to your projected turnover when looking at costing a facility. Whilst a higher turnover business may attract a lower turnover percentage, usually the funder will set a “minimum fee” to protect their income so if your turnover drops, you may be penalised with a top up fee.

Some funders have additional fees, known as disbursements. It is important to be aware of when these fees will apply as this could increase the cost of your facility significantly.

What it can save you:

  • Bank Charges - A regular flow of cash into your account gives you a healthier bank balance, meaning you could save on bank interest and charges.
  • Time and Money – If you choose factoring, the funder will chase payments on your behalf, saving you the time and administrative costs involved in chasing invoices yourself.
  • Lost Opportunities - Peace of mind to accept new and larger orders with access to the cash you need to fulfil them.

Many invoice finance providers will insist on taking assignment of your whole turnover and will require you to commit to a contract.

Selective Invoice Financing

Unlike “whole turnover” financing, Selective Invoice Finance allows you to choose which invoices or debtors should be put forward for funding. You can then choose when and how much you wish to draw from the selected invoices and you are only charged a percentage on the monies drawn, calculated daily. Selective Invoice Finance is a great option if you’re looking for flexibility as you are not tied to any contract and can dip in and out of the facility as needed. It can be more cost effective if you only have short term or occasional cash requirements. You also have the option to repay early using other funds, thus reducing the cost.

When considering whether Invoice Finance is right for your business it’s important to understand how the facility will work once up and running. It doesn’t work for everyone and if not used correctly could result in additional cost. The funder will need to validate the invoices which will involve contacting your customer or requesting supporting documentation. The funder may also require ongoing access to financial information such as Financial Accounts and/or bank statements.

At Key Commercial Finance, we have a team of Consultants who can explain the process and search the market on your behalf to get the best facility for your business.

David Menaghan
Commercial Finance Consultant
Key Commercial Finance Solutions Ltd
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