The Business Benefits of Invoice Financing

When looking for financial support, there are many product offerings that business owners can turn to. Factoring and invoice discounting are alternative products to traditional bank loans and overdraft facilities that are really focused on helping a business’s day-to-day cash flow.

What are the Advantages of Invoice Finance?

Invoice financing offers a wide range of benefits to B2B businesses. Let’s dive into some of the key advantages.

1. Improve your cash flow

Cash flow issues can jeopardise any business’s ability to pay its suppliers, wages and overheads. According to the Federation of Small Businesses, 62% of small companies in the UK have experienced late payment problems at some point, and the pandemic has only worsened the problem. In early 2020, the digital bank Tide estimated the total amount owed to UK SMEs in late payments at over £50 billion.

By factoring your invoices, you’ll receive an immediate cash injection to the business. The sum of the injection is typically 90% of what is owed to your business by your customers in the form of outstanding invoices. It is worth noting that some funders can even provide the full 100% funding upfront (minus their fee).

As well as funding outstanding invoices, a factoring or invoice discounting facility will allow you to fund your future invoices, providing ongoing support and greater certainty when it comes to cash flow. And by paying your suppliers earlier, you can improve profitability by accessing discounts on your purchasing, or by capitalising on new business opportunities as soon as they arise.

Unlike an overdraft where you have a fixed limit, invoice finance is a flexible solution that will grow with your business, as you are releasing a percentage of your invoice. The larger your invoicing, the more money you will have available.

This is perfect for businesses who may have seasonal orders or a small number of clients who pay larger-value invoices, as where sales are high it is likely that they will need more cash to buy inventory, pay staff, and so on. In these cases, invoice financing means having the necessary cash available to keep your liabilities in check.

Unlike traditional financing options that use your assets as collateral, invoice finance is a quick and hassle-free alternative that leaves your property, inventory and other assets alone. Invoice finance providers typically work much faster than banks, and as specialist brokers we’re experienced in getting facilities set up for our clients in a matter of days.

2. Get immediate access to cash

Invoice financing provides working capital fast. We’re confident we can get you from enquiry to cash in the bank within a couple of working days. After that, as soon as you raise an invoice, the agreed percentage of its value will be advanced to you as liquid cash, usually within 24 hours. This short turnaround time sets invoice financing apart from more traditional forms of business finance.

Crucially, invoice finance companies look at the creditworthiness of your customers, not your company. That makes it a great option for newer businesses, as it allows you to access larger amounts of cash without being dependent on previous trading history or lengthy applications and credit appraisals (as with bank overdrafts and loans).

3. Outsource your credit control

As well as providing you with the funding, a factor will also support your business by following up on outstanding and overdue invoicing.

In the UK SME sector alone, businesses are spending an average of 1.5 hours a day chasing unpaid invoices. In some cases, business owners are forced to take on a member of staff to carry out these credit control activities.

With invoice factoring, the cost of this admin is included in the cost of the facility, leaving you free to focus on running your business and without having to incur the additional cost of a credit controller. So not only will you get a percentage of the invoice value advanced to you upfront, the factor will also chase the customer for payment for you, freeing up valuable productivity time.

Prefer to keep your credit control in-house? It’s important to remember that credit control is not compulsory. Other invoice finance facilities such as CHOCCS (Client Handles Own Credit Control Services) and invoice discounting will allow you to leverage the benefits of invoice finance while retaining full control over your sales and invoicing.

Businesses also have the option to keep their factoring or invoice discounting arrangements confidential, meaning that customers will be unaware of the facilities involved. This is especially useful for larger companies and brands that want to keep only their names and accounts on invoices.

4. Grow your business

Business expansion requires money in the bank, whether it’s for investing in new inventory or equipment or hiring new staff. Invoice financing gives you access to better, more flexible working capital. This means you’ll be in a position to offer larger credit lines to your customers, or react to new market opportunities, as you’ll be receiving up to 90% of your invoice immediately via your finance facility.

If you’re a business who has not offered credit before, invoice finance will give you the flexibility to do this and grow your sales.

Unlike an overdraft from a bank, your invoice finance facility grows with your business. The more invoices you send out, the more you can borrow. The costs of the facility also align directly with your business performance. In busier times with higher sales, you’ll have the cash available to expand your business. Of course, that means slightly higher fees, but in quieter periods you won’t be paying as much for the facility.

Invoice financing also enables investment in your company, be it in new staff or new products and services.

It’s always important to remember an invoice finance company will suggest what credit limits they deem suitable for each customer. They will also not lend you money against a customer who is not creditworthy.

5. Protect your business from bad debt

When using invoice finance, many businesses prefer to insure their invoices too.

This means that if your customer goes bust, any outstanding invoices owed will be covered by the factor, eliminating your risk of not getting paid.

In some cases, an invoice financier may suggest that bad debt protection must be part of the facility, for example if you are providing a significant amount of work to just one or two customers.

As the invoice finance market gets ever more competitive, some lenders may offer bad debt protection (also known as credit protection) at lower rates for a limited time.

Ultimately, bad debt protection is there to give you greater confidence in the invoice finance setup, as well as the ability to extend payment terms to customers without the usual worries about late or non-payment.

6. Access a lower cost of borrowing

It’s highly likely that your invoice financing rates will be significantly lower than the interest repayments on a typical business bank loan.

Although invoice financing gives you access to up to 90% of all your outstanding invoices, it doesn’t mean you have to draw down the full amount. This means that in months where you don’t need as much cash flow support, the cost of the facility will drop. Some business owners use invoice finance for added peace of mind, knowing they may not have an ongoing requirement but if they do, they have a pot of cash waiting for them.

It’s also worth bearing in mind that you only pay interest on the money you draw down; if you don’t draw down, there’s no discount fee to pay. You’ll still, however, have to pay the service fee whether you draw down or not.

Most B2B businesses are eligible for invoice finance and it’s relatively straightforward to qualify. That makes it an ideal choice for startups and small businesses that can’t access traditional forms of business finance. Sole traders, partnerships and LLPs are also able to secure invoice financing facilities.

We love working with startups and SMEs. Our in-depth knowledge of the market means we can advise on invoice finance options that specifically address the liquidity challenges of smaller businesses.

7. Less paperwork, more peace of mind

In some cases, no additional security is required to set up a factoring facility other than the invoice itself. In the UK, an extensive credit history is not required.

Remember: the factoring provider is more interested in the creditworthiness of your customers. This means that businesses that have previously been turned down by the bank may find a viable and valuable alternative in invoice finance. If a business is looking for a long-term relationship, it is extremely likely that the lender will require a debenture, but there are not always requirements for personal guarantees.

Invoice financing is also completely separate from asset-based lending, meaning that your company’s assets are not at risk. Likewise, if your company has few assets and is therefore unable to access other business finance products, invoice finance can fill the void.

It’s also possible for businesses that are significantly loss-making but in a state of turnaround to be supported, as invoice finance facilities are structured to look at the future rather than the past. If you have a large amount of work in the pipeline with a good debtor, funding will be available. (If the business isn’t financially sound, additional security may be required in the form of a larger personal guarantee.)

Last but not least, using invoice discounting (or confidential factoring) means that business relations will carry on as before, giving you (and your clients/customers) added peace of mind.

Every business faces its own unique challenges. At Compare Factoring, we take the time to understand each business and what hurdles they currently face.
As a specialist invoice finance broker, we can add value in your search by providing you with independent support as well as access to lenders you may not have found yourself.

If you’d like to find out more on how invoice factoring, invoice discounting or selective invoice finance can help your business grow or manage cash flow, give us a call on 01322 741 425 or drop us a line at hello@compare-factoring.co.uk.