In this arrangement, the invoice finance provider (factor) not only advances you the funds but also takes responsibility for collecting payments from your customers or clients. This can free up your time and resources, but it's important to consider how your customers may react to this collection process.
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What is invoice financing?
Invoice financing is a financial solution that enables businesses to access funds tied up in unpaid invoices. Instead of waiting for customers to pay, you can receive a percentage of the invoice value upfront from a lender, improving cash flow and ensuring steady operations.
It’s especially beneficial for businesses facing delayed payments or aiming to capitalise on growth opportunities. By bridging cash flow gaps, invoice financing can help cover operating costs, manage expenses, and maintain financial stability.
How does invoice financing work?
When a business issues an invoice to a customer, it typically has to wait for 30, 60, or even up to 90 days to receive payment. This delay can create cash flow gaps that hinder day-to-day operations and may even impact the ability to grow.
Invoice finance bridges this gap by providing immediate access to a significant portion of the invoice's value. Here's how it works:
Invoice creation: Your business delivers goods or services to your customer and issues an invoice, as usual.
Invoice submission: You submit that invoice to an invoice finance provider, also known as a factor.
Advance payment: The factor typically advances you a substantial portion of the invoice's value - sometimes up to 90% - within 24 hours.
Debt collection: The factor now takes responsibility for collecting the full payment from your customer when the invoice payment is due.
Remaining payment: Once the customer settles the invoice, the factor deducts their fees and transfers the remaining balance to your business.
Invoice finance ensures your business has a more predictable and steady cash flow. This makes it easier to cover operating expenses, invest in growth, and take advantage of new opportunities without waiting (or chasing) customers for payment.
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Is invoice financing right for my business?
Determining whether invoice finance is suitable for your business depends on various factors:
Cash flow needs
If your business regularly experiences cash flow gaps due to delayed payments from customers, invoice finance can be a useful solution to bridge those shortfalls.
Customer payment terms
If your customers have long payment terms - e.g., 30, 60, or 90 days - invoice finance can provide much-needed liquidity while you wait for payment.
Growth ambitions
If you aim to expand your business, take on larger projects, or invest in new opportunities, invoice finance can provide the necessary capital.
Creditworthiness
Invoice finance is often more accessible than traditional loans, making it suitable for businesses with limited credit history or lower credit scores.
How much does invoice finance cost?
The cost of invoice finance varies by provider, but things to consider that may increase or reduce the cost include:
The size of your business
The number of invoices and their value
The creditworthiness of your customers
You can usually expect to pay a percentage fee based on the invoice value and the time it takes for your customer to settle the invoice.
It's a good idea to get quotes from multiple providers and compare their fees to find the most cost-effective option for your business.
Types of invoice finance
Factoring
In this arrangement, the invoice finance provider (factor) not only advances you the funds but also takes responsibility for collecting payments from your customers or clients. This can free up your time and resources, but it's important to consider how your customers may react to this collection process.
Invoice discounting
Invoice discounting is a more discreet option. Your business retains control over the collections process, and your customers may not even be aware of the financing arrangement at all. It's a good choice for businesses that want to maintain their customer relationships while accessing cash flow.
Selective invoice finance
Selective invoice finance allows you to tailor the loan a bit more. You select which invoices you'd like to be handled by the finance provider and you handle the rest as normal. This can be a helpful option if you're worried about how some customers may perceive the collection method.
Types of invoice finance
Factoring
Invoice discounting
Invoice discounting is a more discreet option. Your business retains control over the collections process, and your customers may not even be aware of the financing arrangement at all. It's a good choice for businesses that want to maintain their customer relationships while accessing cash flow.
Selective invoice finance
Selective invoice finance allows you to tailor the loan a bit more. You select which invoices you'd like to be handled by the finance provider and you handle the rest as normal. This can be a helpful option if you're worried about how some customers may perceive the collection method.
Pros and cons
Pros
Immediate access to cash from invoices helps you cover operating expenses, seize growth opportunities, and stay financially stable
You can better plan and manage your finances with predictable cash flow
With factoring, you can offload the hassle of chasing payments to the finance provider
Cons
Fees can be higher than other financing options. It's essential to compare costs carefully
Factoring may affect how customers perceive your business, as they interact with the finance provider for payments
May not be suitable or necessary for all businesses, particularly if your business already has a healthy cash flow
Alternatives to invoice finance
Business loan
A business loan provides a lump sum of money that you repay over time with interest. It’s useful for funding growth, covering one-off expenses like equipment or property, or investing in new opportunities.
Business lines of credit
A revolving line of credit provides flexible access to funds when needed, allowing you to borrow and repay as necessary.
Grants and government programs
Explore government grants or assistance programs available to businesses.
Angel investors or venture capital
If you're open to giving up equity, consider seeking investment from angel investors or venture capital firms.
Alternatives to invoice finance
Business loan
A business loan provides a lump sum of money that you repay over time with interest. It’s useful for funding growth, covering one-off expenses like equipment or property, or investing in new opportunities.
Business lines of credit
A revolving line of credit provides flexible access to funds when needed, allowing you to borrow and repay as necessary.
Grants and government programs
Explore government grants or assistance programs available to businesses.
Angel investors or venture capital
If you're open to giving up equity, consider seeking investment from angel investors or venture capital firms.
FAQ
Can I use invoice finance if my business is just starting?
Yes, you can use invoice finance as a startup, but eligibility depends on factors like your business’s creditworthiness and invoicing history. Some providers specifically work with new businesses to offer invoice financing solutions.
Will my customers know I'm using invoice finance?
Whether your customers know you’re using invoice finance depends on the type of financing you choose. With invoice discounting, your customers won’t be aware of the arrangement, while invoice factoring involves the finance provider contacting your customers for payment collection.
How long does it take to set up an invoice finance facility?
Setting up an invoice finance facility typically takes a few weeks, depending on the provider’s requirements and how quickly you can provide your financial records. Some lenders may offer a faster setup if all documentation is in place.
Is invoice finance suitable for seasonal businesses?
Yes, invoice finance is suitable for seasonal businesses as it helps maintain cash flow during slow periods and ensures they have the funds needed to prepare for peak seasons.
How long does it take to get the money?
The time it takes to get money from invoice finance depends on whether you're a new or existing customer. New customers may face a longer process as lenders require certain information for setup, while existing customers can typically access funds much faster.
To speed up the process, it's important to respond quickly to information requests and have all necessary documentation ready in advance.
How much are the fees?
The fees for invoice finance vary depending on the lender, the type of invoice finance you choose, and how long the invoice remains outstanding. Typically, you’ll be charged interest on the advanced funds from the day you receive them until the invoice is settled. It’s important to check with your finance provider for specific fee details to ensure invoice finance is the right option for your business.
How does repayment work?
Repayment for invoice finance works by having the finance provider collect payment from your customers directly. Once the customer pays, the provider deducts their agreed fees and transfers the remaining balance to your business. If payments are delayed, the provider may handle debt collection on your behalf. Since repayment terms can vary, it’s important to review your contract for specific details on how invoice finance repayment works.
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