Invoice finance can offer many benefits to B2B businesses. It enables them to fund new business immediately rather than wait for cash which is tied up in invoices.
What is invoice finance?
Invoice finance is a collective term for a type of financial service. It’s a flexible finance solution which can help businesses regulate their cash flow and keep on top of their finances. There are two main types of invoice finance, which are:
- Factoring – You issue invoices to your customer with instructions to make payment direct to the factoring company. Usually within 24 hours the factoring company will advance up to 90% of the invoice value. When the factoring company is paid by your customer you will receive the remaining balance of the invoice (after deducting any charges). The factoring company manages collection of your ledger.
- Invoice discounting – This is similar to factoring but you remain in control of your sales ledger and hide your involvement with a financing company from your customers. Charges and interest are generally lower. Available to larger, established companies.
As a result, there are many benefits to invoice finance for businesses. These include:
Is it flexible?
Invoice finance is a flexible finance solution for businesses. The more invoices you issue the more you can borrow. The facility and your factoring company work with you to create a package that works for you and the type of business you run. The facility grows with your business unlike a bank overdraft.
Most B2B businesses are eligible
If you are a business that issues invoices to other businesses then you will generally be eligible for invoice financing. There may be issues to be aware of in relation to the type of business you are or your liquidity position but it is quite an inclusive financing option. There are factoring companies that specialise in different sectors so if you are struggling to obtain finance from a traditional lender it is worth contacting us.
It bridges the gap between sale of goods and receipt of payment
The main benefit of invoice finance is that it provides a cash injection right when you need it while you are waiting for payment of an invoice to come through. The way that invoice finance works is when you issue an invoice, the factoring company lends a percentage of the invoice value (usually up to 90%) into your company bank account. On receipt of payment from your customer, the factor will pay you the remaining balance.
It allows you to manage your cash flow
As you are not having to wait for payment of invoices, you will have cash available to you to manage your liabilities, reinvest in your company and continue to produce more stock to sell on to customers. Being able to manage your cash flow efficiently gives you greater flexibility and provides you with a safety net for your business to try to avoid cash flow problems and insolvency.
It makes you less likely to default on liabilities
As mentioned above, the certainty of cash in your account and being able to manage your cash flow makes you much less likely to default on your liabilities. Being able to pay any business overheads, invoices etc. on time is very important to maintain your reputation and liquidity position overall. Invoice finance is a good way to manage this and potentially avoid insolvency. It also enables you to negotiate discounts on purchases.
It allows you to grow and invest
This cash injection will not only covers costs and let you pay your liabilities, it gives you the opportunity to invest in your company. You could invest and grow on a small scale by deciding to expand your range or diversity as your popularity grows. Having the option to be able to grow and develop exactly when you need to is a luxury many businesses do not have and can be very beneficial for you.
Chasing the payments for you (factoring only)
If you decide to go down the factoring route, then your factoring company will chase the payments from your customers for you. They will pay you a percentage of the invoice value and then they will chase the money from your customer up for you, taking the pressure and responsibility off your shoulders. This leaves you free to concentrate on other business matters instead of chasing up outstanding debt, whilst importantly having a good flow of cash.
It allows you to retain full responsibility over your sales (invoice discounting only)
However, if you decide to enter into the invoice discounting route then you will continue to have full responsibility over your sales and invoices. Your factoring company will still provide you with a percentage of the invoice value and chase the money from your customer but you will continue to have your name associated with your invoices.
It hides the finance company’s involvement with your invoices, placing only your name and your accounts with customers. This is particularly good for big companies and brand names that don’t want their customers to be aware that they are using a factoring company to deal with their invoices for them.
There are many benefits to invoice finance for so many businesses, which is why it is becoming a very popular way of dealing with customers and managing cash flow. As the popularity increases, it may be worthwhile researching into the financing solution to see if this is something that would benefit and suit your business.