Friday 20th Mar 2020
Thousands of UK companies choose to use alternative funding products to help their business thrive, but there’s still a lot of confusion about what the market can offer. Invoice finance is popular, but it can be confusing if you’re only familiar with more traditional finance products like loans and overdrafts. Invoice discounting is one product within this, and it involves a rolling agreement. To help you decide whether or not invoice discounting might be a good fit for your business, read on.
How does the agreement work?
Invoice finance products are generally treated like an ongoing source of funding and finance facility. They’re not like a loan where you’d take a lump sum and pay it back over an agreed period of time. In short, the idea is that every time you raise an invoice with a customer, you can borrow the value of it immediately until the customer pays, and all of the details are agreed beforehand.
So when you start an invoice discounting agreement, there’ll be a few things to cover:
- The value of each invoice that you’ll be paid when you raise one
- The monthly cost of having the finance agreement, which is generally based on how much the business turns over
- Any interest that you’ll need to pay on each invoice
- Any additional costs such as an arrangement fee
- The start date and length of the finance agreement
In practice, the agreement will mean the following happens:
- Your business will deliver goods or services as normal, but when the invoice is raised to the customer, a copy will go to the finance provider
- The finance provider will pay you the agreed proportion of the invoice right away, usually within a day
- When the customer pays the invoice (the money goes to the finance provider), the remainder of the value of the invoice is paid to you, minus any interest due
- This will repeat for any invoice that you raise
- Every month, you will pay a fee to maintain the agreement
Why would a business choose to use an invoice discounting agreement?
Invoice discounting agreements are generally chosen to help resolve cash flow issues. A business can be trading well, but if too much money is outstanding and tied up in invoices, major problems can occur. Cash is essential for paying monthly expenses such as rent and payroll. Taking on debts to try and overcome this can be risky, but with invoice finance, the future receipt of the invoice value is a known quantity. Cash flow is also required for growth and expansion; businesses that are looking to aggressively move through the market will want invoices to be paid immediately to have cash on hand that can be used to take advantage of opportunities in the market.