Tuesday 28th Jan 2020
If you’ve been looking for cash flow solutions for your small or medium sized business, then you’ll almost certainly have come across invoice finance as an option. It’s still an unknown idea to many businesses, but many thousands in the UK use it very successfully. The question is, what is it and how does it work?
Is invoice finance like a loan?
Invoice finance doesn’t work like your traditional finance product, because it’s an ongoing agreement. Whereas a loan will have a set start and end date, invoice finance takes the form of an available facility that you can use when needed. In some ways this is similar to an overdraft, but with far more specific mechanics that are geared directly towards combating the cash flow issues that arise when invoices get paid late.
How does an invoice finance facility work?
There’s a process for invoice finance, which will change slightly from provider to provider, and which is also influenced by the type of product chosen. Generally however, there’s a set order to the way in which an invoice finance account will work. It goes as follows:
Your business delivers goods or services just like normal. And when you do, you’ll raise an invoice which will go to the customer and your finance provider.
Within around 24 hours, your finance provider will give you most of the value of the invoice. Usually, this is around 85%.
Either you or the finance provider (depending on product) will collect the value of the invoice from the customer.
When your customer pays the invoice, the remaining 10/15% of the invoice value will be deposited in your account.
You will be charged a service fee which is charged as a percentage of your gross turnover. And a finance fee which is charged against your daily outstanding balance.
Why do businesses use invoice finance?
Invoice finance is mainly used to help improve cash flow. Cash flow is what ensures that a business has the money on hand to pay for things like payroll, stock and any other kind of regular costs. It can also be used for investment when businesses want to expand or take advantage of gaps spotted in the market. Unfortunately, many small businesses in the UK do struggle with their cash flow, even if they’re otherwise profitable. This is generally the result of customers that pay their invoices very late. By using an invoice finance facility, businesses can mitigate the problems caused in the delay between raising an invoice and it being settled.
In the case of some invoice finance products, such as invoice discounting, the finance provider also takes charge of credit control. This means that smaller businesses, or businesses with major debt-chasing problems, no longer have to worry about collections - an experienced finance provider will take care of this.