Wednesday 23rd Oct 2019
Small to medium enterprises (SMEs) account for approximately 99% of all private-sector businesses here in the UK. Unfortunately, around 57% of SMEs struggle with cash flow problems at one (or more) stages of the business lifecycle. Particularly if they are a business to business (B2B) business that has to wait 30-90 days before their clients settle unpaid invoices. Businesses facing cash flow issues typically struggle to:
buy in new stock
keep up with staff wages
fund the next stage of their expansion
negotiate better discounts with their suppliers
invest in staff training initiatives and/or improving conditions
Which is why many B2B SMEs leverage some form of business finance. Asset based lending and invoice finance are two (increasingly popular) options that can be used to raise extra funds. These instruments typically allow businesses to:
release cash quickly (often in as little as 24-48 hours)
obtain funds without the need for lengthy or complicated contracts
maintain good cash flow on a month-to-month basis
Generally speaking, asset based finance and invoice financing arrangements also benefit from very low interest rates - due to the fact that the amount they let you borrow is tied directly to your business’s income or assets.
Understanding the ins and outs of asset based finance and invoice financing can be complicated though. They’re simple instruments, but they can be altered according to the size of your business, and there are a great many variables that seriously complicate the way they work. Which is why we’ve put together this brief guide - providing an overview of both, and giving you some insight into the pros and cons that are usually associated with asset based financing.
What is asset based lending?
To kick things off, we’re going to start by looking at asset based lending. This is a generic term for any loan that is secured against assets your business already owns. Using these asset-secured structures usually involves offering up stock, plant, property or machinery as collateral that can be recovered in the event of a default. Some asset-based loans can also be taken out against intangible assets like intellectual property or predicted forward income streams too, although this is rarer.
What is Invoice Finance?
Invoice finance is a specific type of asset based lending, which allows you to borrow money against the value of unpaid invoices. In basic terms, a lender allows you to loan an amount equal to a percentage of your unpaid invoices, before they have been settled by your clients.
In return, you agree to repay the amount in full once the invoices have been settled, plus a small fee for the use of this facility. In some cases, the lender allows you to collect the invoices as usual and the agreement remains confidential, this is referred to as Invoice Discounting. Alternatively, you can outsource your credit control to us leaving it in the hands of professional experts who have many years experience of getting good results. This is referred to as Invoice Factoring.
How can I Finance my Invoices?
If you’re interested in invoice financing, you should know that the size of your business will determine the type of funding that’s made available to you. Invoice discounting can only be offered to businesses that have their own, in-house credit control department. Discounting agreements also require more trust on the part of your factor, and they’re normally only offered to larger businesses with a stable client base.
Factoring agreements remove the need for in-house credit control staff, which is one of the reasons that they’re normally offered to SMEs. Factoring agreements also effectively outsource the management of your sales ledger, which means you’ll have much more time to invest in growing your business. The downside is that you won’t be able to control every aspect of client-side communications, but the benefits often outweigh the costs, and it’s worth noting that the focus on freeing up your time is one of the reasons that invoice factoring is so popular amongst businesses in the early stages of the growth cycle.