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Maximizing Cash Flow: A Guide to Invoice Finance for UK Business Owners
Invoice finance is funding that allows businesses to borrow money against their unpaid invoices. Essentially, a company can use its unpaid invoices as collateral to secure a business loan.
This type of financing can be useful for businesses of all sizes but is particularly beneficial for small to medium sized companies that may have difficulty obtaining traditional forms of financing.
Invoice finance is a useful tool for UK businesses looking to manage their cash flow or maintain growth. But it's important to carefully research the types of invoice finance available and the potential pros and cons for your business before making a decision.
In this guide:
What is Invoice Finance, and how does it work?
The reasons a business might need to use invoice financing
What are the different types of invoice finance available?
The pros and cons of using invoice finance
Eligibility Criteria for invoice finance
Is invoice finance regulated in the UK?
How do I apply for Invoice Finance?
Call us on 0117 959 5094 to discuss your requirements.
Or you can book a free consultation with one of our expert advisors at a convenient time for you below.
What is Invoice Finance?
Invoice finance, also known as invoice factoring, invoice discounting, business invoice finance or accounts receivable financing, is a type of working capital loan that allows businesses to borrow money secured against their outstanding invoices.
It enables a company to access cash otherwise tied up in unpaid invoices. It can be a flexible and efficient way for businesses to manage their cash flow, meet financial obligations, and grow.
Our video below goes into the details of invoice financing and what it's used for:
How does it work?
Let's say a business sells goods or services to a customer and issues them an invoice for £10,000. They might not get paid for 30 days, but they need that £10,000 to pay their own bills - this is the essence of cash flow.
With invoice finance, a business can get that £10,000 immediately from a lender and then pay it back (with interest) when their invoice is paid.
There are two main types of invoice finance: invoice factoring and invoice discounting:
Invoice factoring is when a business sells their unpaid invoices to a factoring company. The factoring company pays the business a percentage of the invoice amount, usually around 80%, and the factoring company then takes over the task of collecting the payment from the customer.
Invoice discounting is similar, but the business still collects the payment from their customer. In this case, the business borrows money from a lender, using their unpaid invoices as collateral. The lender then pays the business a percentage of the invoice amount, usually around 85%, and the business repays the loan when it collects its invoice.
Both invoice factoring and discounting are quick and easy ways to get cash flow. And it's not just for small businesses. Big companies use invoice finance, too - it's a great way to manage cash flow and keep your business running smoothly.
See similar: How Do Business Loans Work? & Business Finance - The 11 Best Options
Why might you need invoice financing?
One of the main reasons businesses might need invoice finance is to improve cash flow.
Paying bills and meeting other financial obligations can be difficult when a business has unpaid invoices. Invoice finance allows businesses to access the funds tied up in those unpaid invoices and keep operations running smoothly.
Additionally, businesses with a high volume of invoices may be affected by delays in processing them.
Here are a few businesses commonly affected by this problem:
- construction companies
- manufacturers
- service providers
Another reason businesses might turn to invoice finance is to help with growth.
When a business expands, keeping up with the increased demand for goods and services can be challenging. Invoice finance allows businesses to borrow against their unpaid invoices, so they can:
- invest in new equipment or offices
- hire additional staff
- or expand their operations in other ways
10 most popular businesses for using Invoice Finance
In our experience, businesses operating in the following industries are most commonly affected by a high volume of invoices and delayed payments:
- Construction
- Manufacturing
- Agriculture
- Logistics
- Professional services, i.e. homecare
- Recruitment agencies
- Temp agencies
- Security firms
- Transport i.e haulage
-
Printing and Publishing
What are the different types of invoice finance available?
There are several types of invoice finance available to businesses in the UK. The most common types are:
- Invoice Factoring: This type of finance involves a company selling its outstanding invoices to a factoring company, which then advances a percentage of the invoice value to the company. The factoring company then collects payment from the customer and remits the remaining balance, minus a fee, to the company.
- Invoice Discounting: Similar to invoice factoring, this type of finance also involves a company selling its outstanding invoices to a lender. However, in this case, the company remains responsible for collecting payment from the customer and remitting it to the lender. The lender advances a percentage of the invoice value to the company and charges a fee for the service.
- Selective Invoice Finance: Selective invoice finance is relatively new in the UK and allows businesses to receive funding on invoices as much or little as they like. When a business needs an invoice funded, it can be uploaded to a platform, and the business will receive up to 90% as an upfront payment. The remaining 10% or balance is returned minus the pre-agreed fee as soon as the invoice is paid.
- Confidential Invoice Discounting: This is similar to invoice discounting, but the lender does not disclose to the customer that the invoice has been sold.
- Reverse Factoring: This type of invoice financing is also known as supply chain financing. In this process, a lender pays the supplier directly, and the buyer repays the lender later.
The Pros and Cons of invoice finance
The main benefits of invoice finance include the following:
- Improved cash flow: Invoice finance allows businesses to access the funds tied up in their outstanding invoices, which can improve cash flow and help with day-to-day operations.
- Flexibility: Invoice finance can be tailored to suit the specific needs of a business and can be used on an ongoing basis or as a one-off solution.
- Speed: Invoice finance can provide businesses with quick access to funds, often within 24 hours of an invoice being raised.
- Reduced administrative burden: Invoice finance can take the administrative burden off a business by handling the collection of payments from customers.
- Cost-effective: Invoice finance can be a cost-effective way of financing a business, as the costs are usually based on a small percentage of the invoice value.
- Increased working capital: Invoice financing can provide additional capital to the business to improve working capital which can be used to expand and grow the business.
- Invoice finance can also be used to make your business more sustainable, an increasingly important requirement for businesses in the modern world.
Invoice finance, like any financial product, has its drawbacks. Some of the main drawbacks of invoice finance include the following:
Costs: Invoice finance can be expensive, with fees and interest rates that can add up over time. Some lenders may also charge additional fees for credit checks and account management services.Loss of control: Businesses that use invoice finance may lose some control over collecting payments from their customers.
Credit risk: Invoice finance can be risky for businesses with customers with a poor credit history or a high risk of defaulting on payments.
Reduced profit margins: Invoice finance can reduce profit margins, as the fees and interest rates charged can be significant.
Dependence: Businesses may become too dependent on invoice finance, which can lead to financial difficulties if the lender stops funding or the business experiences a downturn in sales.
Call us on 0117 9595094 to discuss your requirements.
Eligibility Criteria for invoice finance
The eligibility criteria for invoice finance can vary depending on the lender but generally include the following:
-
Creditworthiness of the business: Lenders will typically check the business's creditworthiness, including its credit score, financial statements, and payment history.
-
Creditworthiness of the business's customers: Lenders will also check the creditworthiness of the business's customers, as they will be responsible for repaying the invoice finance loan.
-
Business size and turnover: Lenders may have minimum requirements for the size and turnover of the business.
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How long the business has been trading: Lenders may have a minimum time in the business requirement and may be more likely to provide funding to established businesses.
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Invoice volume: Lenders may have a minimum invoice volume requirement
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Collateral: Some lenders may require collateral or a personal guarantee to secure the loan.
It's important to check with different invoice finance providers and compare their criteria and terms before making a decision.
Is invoice finance regulated in the UK?
Invoice finance is not regulated in the UK.
This means it's worth paying close attention to fees and charges associated with your loan.
And this is why using an invoice finance broker can help ensure you're getting the right type of invoice finance for your business - at a good price.
How do I apply for invoice finance?
Here at Clifton Private Finance, our business finance specialists offer a complimentary advice service and can help you choose the right finance solution for your business requirements. They have access to a wide range of invoice finance solutions from across the market.
Our team of advisers will help you to source the most competitive cash flow funding solution.
Our business loan service provides:
- Market-leading rates
- Fast service - finance within 2 to 7 days
- Access to specialist lenders
- Expert advice - professional service
Call us on 0117 959 5094 to discuss your requirements.
Or you can book a free consultation with one of our expert advisors at a convenient time for you below.
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