Invoice finance is a solution for easing cash flow issues, allowing businesses to turn their outstanding invoices into immediate working capital.
Late payments are a frustration that many businesses will be all too aware of: you’ve delivered a project on time and invoiced as agreed – but the client’s missed the payment deadline, despite the fact that you’ve got your own bills to pay (including your employees’ salaries). Just a few missed payments can lead to a very tight cashflow situation, and that’s stress that no business owner wants.
If it’s any consolation, you’re not alone. Late invoices are a real pain for many smaller businesses with depressing stats from the business disputes register showing that 30% of invoices aren’t paid within the agreed terms. There’s even evidence to suggest that late payments cause over 1-in-5 insolvencies.
This is where invoice finance can help. It’s a handy option for releasing funds from your existing invoices, allowing you to cover your bills as and when you need to.
Its flexibility makes it ideal for small and medium-sized enterprises (SMEs), which, incidentally, form the backbone of the UK economy. In fact, SMEs account for an astounding 99.9% of UK businesses. As such, it’s vital that they have easy access to finance when they need it.
So, what is invoice finance? And is it right for your business? We’ve put together this article to answer these questions, as well as covering invoice finance’s potential advantages, the different types of invoice finance, and why it’s a suitable option for SMEs.
What is invoice finance?
Invoice finance operates on a straightforward principle; when a business generates an invoice for a customer, it can sell that invoice to a finance provider. The provider advances a substantial percentage of the invoice value to the business, typically around 85%, but the amount can vary from 75% – 90%. Once the customer has settled the invoice, the remaining amount, minus a small fee, is released to the business.
This enables businesses to leverage their unpaid invoices as collateral, allowing them to quickly access working capital (rather than waiting weeks or months for customer payments).
One thing that is important to note: while invoice finance is a useful option for a range of sectors, it’s only available for B2B businesses.
Why might SMEs benefit from using invoice finance?
Any industry facing inconsistent income due to client payment delays can use invoice financing by converting unpaid invoices into immediate working capital.
This is why it’s ideal for SMEs, as they’re generally more likely to suffer from irregular cash flows, sometimes surviving on payment to payment. This is especially true for newer businesses or for businesses struggling through challenging economic times (and we’ve had quite a few of those recently).
As an example, if an IT company or other business service has delivered a project and is waiting for an invoice to be settled, but they need immediate funds to take on another client, they can use invoice finance as a way of maintaining smooth working capital. Another good example is in the construction industry, where companies often use extended “milestone” or “completion payment cycles” and can therefore use invoice finance to cover labour and material costs while waiting for their client payments.
Also, new businesses and start-ups, who might find it difficult to get traditional loans, can benefit from getting access to cash through invoice finance.
What are the different types of invoice finance available to SMEs?
The term “invoice finance” actually covers several financial products such as selective invoice finance (or spot factoring), invoice factoring and invoice discounting. Below, we explain each of these in turn.
Selective invoice finance
Selective invoice finance (which can also be called spot factoring) allows businesses to choose the specific invoices they want to finance. There’s a lot of flexibility here as it’s effectively an “as and when” approach that can help companies with their finances if they’re in need of some quick cash (without tying up all of their invoices in a financing arrangement).
Invoice factoring
Invoice factoring is when a business sells its outstanding invoices to a third-party entity (normally a lender) at a discount. The third party will then take on the responsibility of collecting payment from the business’s clients.
Invoice discounting
Invoice discounting is a discreet method where businesses can borrow a certain percentage of their invoice value from a provider. While the business remains responsible for their own invoice collections, they benefit from immediate liquidity.
What are the advantages of invoice finance for SMEs
Invoice finance offers several obvious advantages for SMEs:
1. It improves cash flow
The clearest advantage, and often then main reason why most businesses might consider using invoice finance, is to improve cash flow. A more stable cash flow means at the very least a business can cover operational expenses, and beyond this they can look to take on new projects or make investments for growth.
2. It’s discrete
Image is everything, as they say, which is why providers of invoice finance offer discreet lending. This essentially means that your customers and clients won’t know about any financing help that you’re receiving – helping you to maintain your business’ reputation.
3. It reduces credit risk
If you choose invoice factoring, lenders often assume responsibility for credit control and debt collection. This can be a huge weight off of the shoulders of a small business and, more importantly, it reduces the risk of bad debt for your businesses.
4. It gives you rapid access to capital
Traditional loans can often involve lengthy approval processes, which isn’t really what you want if you find yourself in need of some urgent working capital. Another obvious advantage of invoice finance is that it provides swift access to funds, helping your businesses to plug any cash flow gaps.
5. There are extended payment terms for customers
Extended payment terms can be really useful for improving your current relationships with customers – and it can potentially help you win a contract. Invoice finance can give you the breathing room to offer these longer terms without compromising your own cash flow stability.
How Origin Finance can help
Invoice financing can help with cash flow for SMEs with longer credit terms or if they face late customer payments. Instead of waiting for your customers to settle an invoice, a lender can provide you with a percentage of its value right away.
Are you looking to take on more work or ease cash flow issues? Our team are on hand to discuss your options.
We’ll quickly find the best solution for your business. After connecting you to the right lender, we’ll present your business in the best possible light and agree on suitable terms for your business.
Get in touch for a free no-obligation quote without affecting your credit score.