Wednesday 15th Jan 2020
Invoice finance, which incorporates a number of slightly different financial products, is an increasingly popular option for businesses that need something different from their business finance. Quite unlike loans and overdrafts, it has a specific purpose in mind, and isn’t necessarily for everyone. In this article, we ask the question: is invoice finance a good idea for your business?
What is invoice finance used for?
First, it helps to understand exactly why businesses use invoice finance in the first place. The answer is quite simple. Businesses use invoice finance when they’re having cash flow issues because their invoices are not being paid quickly enough - or at all - by their customers. Cash flow is hugely important to a business - it’s what allows you to meet monthly commitments such as wages, and it also gives you the freedom to expand and develop the business.
The process is straightforward. With an invoice finance facility in place, every time your business raises an invoice for goods or services, the finance provider will pay most of the value of that invoice straight into your account. Usually within a day. This means you’ll have 80%-90% of the money immediately. The rest, minus a small fee, is deposited in your account when the customer pays.
Is invoice finance right for you?
Invoice finance can be very beneficial for businesses both large and small, but there are a few things to remember before deciding if it’s right for you. The first is that while invoice finance is designed to combat cash flow issues, it is not a replacement for revenue. While loans and overdrafts can give you a cash injection when business is slow, invoice finance is predicated on your business successfully winning sales and raising invoices.
There’s also a cost associated with invoice finance. This generally comes in two parts; a monthly fee that’s usually based on your turnover, and then the interest fee for each invoice.
What are the different types of invoice finance?
It’s worth bearing in mind that the term ‘invoice finance’ covers a few different types of product. The two main ones are invoice factoring, and invoice discounting. They are similar, but differ in one important way. And this is that invoice discounting is entirely confidential, whereas factoring is made known to the customer, and in this case the finance provider will take control of credit control too.
What are the alternatives to invoice finance?
There are alternatives to invoice, which are the more traditional types of finance such as loans and overdrafts. These are useful in many different situations, but are not necessarily designed to specifically combat cash flow problems, as invoice finance is. If you’re unsure what finance product you need, then it’s always worth seeking the advice of an independent financial advisor.