What is invoice financing?
Invoice financing is a way for businesses to free up cash flow by borrowing money against outstanding invoices.
If a business wants to take advantage of the benefits of invoice financing, the business will ‘sell’ their unpaid invoices to an invoice financing company. In exchange, the invoice financing company will lend the business up to 90% of the total value of their outstanding invoices. The remaining 10%, minus fees, is given to the business once the invoice has been paid by the customer.
Many businesses will opt for this form of finance when waiting for customer payments. It’s considered a good way to unlock working capital, as the business is technically ‘selling’ an asset to free up cash as opposed to taking out a traditional loan product to access funds.
What types of invoice financing are there?
There are two overarching forms of invoice financing:
1. Invoice factoring: This involves customers settling the invoice with the factoring company.
Invoice factoring a good option for businesses who want a third party to manage the whole invoicing process, meaning the business doesn’t have to worry about collecting payments themselves. It therefore frees up time which can be invested in business growth and management as opposed to chasing late payments.
2. Invoice discounting: This involves customers settling their invoice directly with the business.
In this form of invoice finance, the customer is unaware that a third party is involved, and the process remains confidential. Invoice discounting therefore allows the business to retain credit control and manage their debt collection, invoicing process and overall sales ledger. The business simply sends a copy of the customer invoice to their invoice discounting provider, before receiving the agreed advance.
There are also invoice finance providers who may tailor their product to certain industries. For example, construction finance, recruitment finance and others may offer invoice financing which is catered specifically towards businesses within those particular industries.
What about export or trade finance?
Another example of how invoice finance can be tailored to industries is trade finance, and is designed to help businesses get an advance on invoices from sales overseas. Export finance works in the following way:. This is a type of
- To stay competitive, sellers generally provide their overseas buyers with credit so that the buyer has time to pay for their goods.
- This means that after shipping the goods, the seller may have to wait for the goods to reach the buyer until payment is made. Payment could take months, depending on how long the transit period is.
- However, if the buyer goes into liquidation, or won’t pay for the goods within this period, it may result in the supplier being negatively affected. In fact, even if the buyer does pay within the credit period, waiting months for payment may still impact the supplier financially.
- For this reason, export finance provides a safety net for companies who export trade, allowing them to free up money tied up in foreign invoices by ‘selling’ the invoices to finance providers. Much like traditional invoice financing, the export finance provider will provide the seller with up to 90% of the value of the invoice immediately, and send through the remaining 10%, minus fees, once the invoice has been paid by the buyer.
What sort of businesses could benefit from invoice financing?
Since there are many types of invoice financing available, each tailored to different business types, it can be a popular financing option amongstthat have commercial customers on long payment terms, or even businesses who have customers that habitually pay late.
In addition, invoice financing is a viable cash flow solution for businesses who are unable to access traditional finance products, such as unsecured business loans, due to having a less than ideal credit score. This is because invoice finance lenders will value the cost of your outstanding invoices over your credit history.
It’s also worth bearing in mind that many invoice finance providers will outline specific terms and conditions in their contracts, such as only purchasing commercial invoices. In addition, commercial customers will also have to be creditworthy. As such, if most of your customers aren’t businesses, invoice financing will not be available to you.
Alternatives to invoice financing
If you’re looking for a way to free up cash flow in your SME, it’s well worth considering some alternative options to invoice financing, as the fees associated with invoice financing can be quite expensive if your business relies on this form of finance for a prolonged period of time.
As mentioned above, if you’re considering applying for invoice financing because your business hasn’t got a strong secured business loan with an alternative finance provider., consider asset based finance, or even a
Such providers may ask for you to put up valuable assets, such as property, as collateral against the business loan to offset a low credit score. With a secured loan, the funds can be available to your business in as little as 24 hours from approval, making it a viable option for businesses seeking finance in a hurry.
Apply for a business loan today
If you’re looking for a way to free up cash flow, consider one of our flexible business loans which will provide your business with the opportunity to grow and thrive.
Call the Fleximize team on 0207 100 0110 today and you can have the funding you need in as little as 48 hours. Or, click the Apply Now button below to make use of our quick and easy online application process.