What is Invoice Finance?
Cash flow is one of the most important aspects of running a company and must never be overlooked.
A business can have considerable assets, but if there is no working capital, it will not be able to pay its bills. Because of this, salaries can fall behind, suppliers may be left unpaid, and debts mount up.
One of the problems some companies can face is invoice processing time. Depending on the client, an invoice can have a turnaround of 30, 60, or even 90 days.
Resources, such as time and capital, have been used up, but the money has not been received to pay for them.
Many businesses struggle during this interim period as they wait for a much-needed invoice payment.
Enter invoice finance, business loans tailored to bridge the gap between an invoice being issued and receipt of payment.
Invoice financing can help businesses maintain a consistent level of cash flow and support business growth.
Understanding Accounts Receivable (AR)
The amount that the business has outstanding in unpaid invoices is known as accounts receivable (AR, or sometimes A/R).
Accounts receivable are the balance of funds owed to the business and are thus considered assets on the company balance sheet.
This enables them to be used as collateral for an invoice finance business loan.
The benefit of accounts receivable is that the business can operate by providing credit to its customers without the need for immediate payment for each transaction. In many cases, invoices are paid within 30 days.
Invoice financing is calculated against the total amount of accounts receivable.
What Are Typical Invoicing Terms?
The invoicing term is the number of days provided for customers to pay their invoices.
Unless stated otherwise, the UK government sets a standard payment obligation of 30 days, however, outside of this, your business and its customers can choose terms that best suit their needs.
It is these terms, however, that can often lead to a need for assistance from an invoice finance loan.
Bigger business often have their own invoicing schedules that suit their accounting and are unwilling to bend or break these terms to fit their smaller suppliers. This can lead to an extended period of struggle for the smaller firm.
It is not unusual for a small business to find itself working on a project for many months while waiting for a significant invoice to be paid by an important large client.
Invoice financing can help ensure businesses do not suffer unnecessarily during this period.
Watch our short video below to learn about invoice finance in more detail.
Invoice Finance to Unlock Cashflow
Unlocking your accounts receivable through invoicing financing is quick and easy.
Typically, the amount available is between 75% and 90% of the outstanding invoice total and can be released to you through invoice financing, typically between 24 and 48 hours.
Different Types of Invoice Finance in the UK
Two main types of invoice finance are available for businesses: invoice discounting and invoice factoring.
Invoice Discounting
Invoice discounting is the most common type of invoice finance and is often what is meant when the term “invoice financing” is used.
With invoice discounting, the business borrows against the accounts receivable as an asset.
The loan accrues interest and is repaid in a similar way to any other standard secured business loan.
This type of invoice financing is entirely confidential and is unseen by the customer.
Invoice discounting can either be complete, where the loan value is dictated by the entire sum of accounts receivable; or selective invoice financing, where the loan value is set against the unpaid invoices of one specific customer.
The size and terms of an invoice discounting loan can depend on multiple factors, including previous invoicing and payment history, your invoice terms, and your business sector.
Read more: The advantages and disadvantages of invoice discounting
Invoice Factoring
Factoring is a type of invoice financing where the outstanding debts owed to your business are sold in their entirety to a third-party lender. The new lender then collects the unpaid sums.
When using a factoring company, your customers would become aware that their debts have changed ownership.
Factoring can be a more beneficial type of invoice finance for companies that do not have the time to chase a debt that has become overdue.
Invoice Finance Pros and Cons
Like any business loan, invoice finance has advantages and unique factors to consider before applying.
Advantages:
Better rates
Because of the way invoice finance is secured against your accounts receivable, terms are typically more favourable than an unsecured business loan.
Easy application
In many cases, there will be less focus on your business credit score, and obtaining invoice finance can be relatively straightforward for many companies.
Quick access to funds
Invoice financing can provide funds within 48 hours – this can be a good option if you need funds to pay salaries or bills immediately.
Designed for B2B
The specialist lenders that offer these loans will usually be familiar with the pressure long invoice payment terms can create; invoice financing is tailored to help B2B businesses relieve that strain.
Short-term
Invoice financing is limited to your accounts receivable, which means that you can be confident that the funds are coming in to pay the loan back.
This level of certainty can help when coordinating your finances.
What to Consider:
Cost
Invoice finance is not free. With the loan interest and any fees, you will end up losing some of the value of the invoice when repaying.
Reliance on Customers
When borrowing against future payments by your customers, you are placing trust in those invoices to be paid on time.
If customers are new or have a previously poor record of paying invoices, this can lead to an extended debt and additional fees for your business. This can also affect your business’s credit rating.
Read blog: Invoice Factoring vs Discounting
Get Invoice Finance with Clifton Private Finance
At Clifton Private Finance, we offer a range of invoice options to suit your business.
Our exceptional team can help you source the most competitive invoice finance options.
Our business loan service provides:
- Market-leading rates
- Fast service - finance within 5 to 7 days
- Access to specialist lenders
- Expert advice - professional service
