Companies with a business model of providing services or completing work for customers who are invoiced afterwards can find invoice finance helpful. This business model tends to create a lag between the work being completed, for which you’ll need to have bought materials, invested in resources and paid staff wages, and the money coming in for such work. Customers often have 30-, 60-, 90- or even 120-day payment terms, extending this lag even further.
Invoice finance facilitates growth for companies operating in this way. A larger product will yield larger revenue, but it can be challenging to finance larger projects with the cash coming in at a date which is so far off. Advance payment makes growth more tangible. On top of this, any company that employs and remunerates staff on a weekly basis may find invoice discounting or factoring a useful financing tool. If your still unsure if invoice finance is for your business, take a look at examples of industries and businesses that typically use invoice finance to operate.
Construction
Most businesses in the construction industry have experienced cash flow issues. It’s notoriously difficult to keep cash moving consistently and regularly through a construction business, owing to several factors. Firstly, many construction firms experience seasonal fluctuations, with more work coming in in the summer months than in the winter. It can be difficult to manage these seasonal changes while still managing to pay the same wages to staff.
Secondly, many construction projects involve a long chain of contractors, suppliers and workers. If a company has to wait a long time for payment from higher up the chain, it prevents them from taking on new work. Invoice finance enables construction firms to unlock money tied up in outstanding invoices, allowing contractors or construction firms to bid for new contracts and invest in new materials. Many financiers offer tailored construction invoice finance specially designed for the industry.
Import & export
Companies who frequently deal in foreign trade (importing products or exporting goods overseas) can suffer from substantial cash flow issues. Payment can take even longer from overseas companies, as banks can be slow to convert currencies and make payments into foreign bank accounts. Companies in export trades are also likely liable for a considerable amount of extra fees and costs than local traders, having to adhere to various government regulations abroad.
Invoice finance can protect import and export companies against a cash flow freeze when there’s a delay in payment from overseas. Some providers offer specific invoice finance designed for import and export traders, known as import finance or export finance, tailored to the extended payment terms and issues that come from trading with other countries. Often invoice finance providers will also want to see that you have an adequate trade credit insurance policy in place.
Recruitment
Recruitment companies provide temporary and permanent staff for a range of positions. The payroll pressures can be immense, having to remunerate contracted workers, temporary workers and permanent staff on a weekly and monthly basis.
Clients can take weeks or months to pay their invoices, creating a huge gap between the money going out and the cash coming in. Invoice finance can provide a stop-gap, relieving payroll pressures and allowing recruiters to take on more clients.
Wholesale and distribution
The wholesale industry deals with some of the longest credit terms there are, with many clients having up to 120 days to pay their invoices.
It’s also a very competitive industry where time is of the essence. Undercutting your competitors and bidding on new contracts is imperative to growth in this industry, which is difficult to achieve against the pressures of paying staff, keeping up to date with warehouse and storage costs and buying new stock.
Invoice finance can hugely increase the cash moving through a wholesale business throughout the month, allowing for a smoother Working Capital Cycle.
Case Study
A London-based media company, started using an invoice finance company 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 expensive interest wise and not enough to solve their liquidity requirements. Retaining a good relationship with their clients was vital to their business model, therefore did not want a third-party factor to chase up their debtors. Thus the invoice auction model appealed to them as it meant they could select which customer invoices on which they would raise finance (and would only incur fees when they needed to use it).
This company now regularly uses the service to obtain instant cash of up to 85% of the value of their invoices, paying fees of on average 1.25% of the invoice value.
