A guide to invoice finance

Invoices, receipts and bank statements on table.

Invoice finance enables you to get cash upfront for unpaid invoices instead of having to wait for the customer to pay the bill, which could be several weeks later.

Related: Grants for UK businesses, Loan options for small businesses

There are two different forms of invoice finance:

Invoice discounting

That in which a bank or third party provider advances you part of the value of the invoice immediately in return for a fee. You still collect and manage the invoices yourself and deal with your customers directly.

Invoice factoring

That in which you sell your invoices to a third party which then advances you the money and processes the invoices on your behalf. You can choose between recourse – in which you must refund the money advanced if the customer does not pay up; and non-recourse – in which the provider will cover the cost of any bad debts.

In either case, the provider will typically give you up to 85% of the money owed straightaway. Depending on which type of provider you use, you can either opt to have all your invoices automatically financed, or you can select which individual invoices you wish to be financed. This can be a good flexible option for smaller businesses as it does not require being tied into a long-term contract.

Who can borrow

Businesses with a proven track record and a good spread of customers who sell products or services on credit to other businesses. Invoice finance companies typically offer their services to companies with an annual turnover of at least £50,000, although some will consider start-ups and smaller businesses.

How much can you borrow? Typically 85% of the value of the invoice.

Advantages

You can get the money owed to you immediately rather than waiting for the invoice to be paid, which can make a big difference to your cash flow and working capital. A business that is owed £200,000 may be able to get £170,000 within just a few days. If you decide on invoice factoring, it will free up your time to manage your business. Factoring companies will credit check your customers and give you useful information about their credit standing.

Disadvantages

You need to pay a fee for the service which will reduce the profit margin on each order, and invoice finance may not necessarily be the cheapest form of finance available. If you decide to hand over the whole process to a third party, it can tie you into a long contract, typically three months but sometimes up to a year.

Things to consider

If you use an invoice factoring company they will take over the whole invoice process and deal directly with your customers – some customers may, however, prefer to deal with directly with you, and how the factor deals with your customers will affect what they think of your business, so you need to ensure you choose a reputable company that will not damage your reputation.

Useful contact

Asset Based Finance Association

The practicalities

Several different types of providers offer factoring or invoice discounting facilities, including banks, financial institutions, independent providers and online newcomers such as MarketInvoice.com, which auctions invoices to institutional investors. So speak to more than one company before making a decision. The Asset Based Finance Association maintains a list of invoice factoring providers, with details of their turnover requirements and the services they offer.

Case study

Connected Pictures, a London-based independent production company, started using MarketInvoice.com because their large blue-chip clients were taking between 90 to 120 days to settle invoices, and they needed to find a source of working capital to invest in new projects and fuel growth. They had already taken out an overdraft from their bank, but this was not enough to solve their liquidity requirements. Connected Pictures did not want a third party factor to chase up their debtors as maintaining a good relationship with their clients was vital to their business. The MarketInvoice auction model appealed to them as it meant they could select which customer invoices they would raise finance on, and would only incur fees when they needed to use it.

Ramiro Ramirez, the Finance Officer of Connected Pictures, said: “We approached our bank regarding invoice discounting, but they wanted a guaranteed amount of turnover each year, in addition to monthly and annual fees. We could not guarantee we were going to put that much revenue through invoice discounting because of the nature of our business. MarketInvoice’s flexible approach and transaction-only fees appealed to us”. Connected Pictures now regularly uses the service to obtain instant cash of up to 85% of the value of their invoices, paying fees of 1.25% on average of the invoice value.

If you decide to use an invoice factoring company ask them to let you talk to some of their existing customers first. Reputable firms will be willing to facilitate this.

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