Invoice finance
Invoice finance means borrowing money secured against invoices due from your customers. It offers a fast funding solution while allowing you to maintain your relationship with customers.
What is invoice finance?
Put simply, invoice finance is a way for companies to borrow money against client invoices not yet paid.
It allows you to boost cash flow, pay employees and suppliers and free up funds needed to grow your business. The money could be in your account within a couple of days, meaning you don’t have to wait potentially months for a customer to pay their bill.
If you sell products or services to commercial customers, it’s likely you may consider invoice finance at some time.
Your business sends invoice to debtor
We find you the best deal and send the invoice to our provider
Our provider pays your business a % of the invoice
Our provider performs credit control with the debtor
Debtor sends payment directly to our provider
Below we explain more about how it works and the pros and cons of invoice finance.
Why is invoice finance needed?
Running a business means you’ll be familiar with sending and chasing invoices.
In many cases, it can take weeks for invoices to be paid into your bank account. Some clients may operate 90 or 120 day payment terms.
This can leave you short of funds, stopping you from buying new stock, paying the bills or seizing an opportunity to get ahead of competitors.
How you manage your cash goes a long way in determining how successful your company will be. Invoice finance can boost your cash flow at a time when you most need it.
Thoughts from Matt
“Invoice finance helps with your cash flow, which is essential to the smooth running of a business. It is particularly helpful when you supply goods or services that require you to pay your suppliers quicker than your customers pay you. Without funding to fill the gap it is very difficult to grow your business.
Invoice finance can also alleviate some of the risk of taking on new customers and help you manage your exposure to them. It certainly isn’t a magic financial pill, but invoice finance can certainly help your business function more efficiently.
Contact us today to see how asset finance can be used to help your company grow or branch into new areas.”
Matt Haycox
Founder and CEO, Funding Guru
How invoice finance works
- You issue an invoice to a customer
- You receive a percentage of up to 90% of the invoice total (typically within a couple of days)
- When the customer pays the invoice, the payment is made into an account operated by the lender
- The lender then sends the remainder due to you, less fees
- Or you (the company) receive the full invoice amount, and you repay the amount borrowed from the finance provider (plus fees)
- Depending on the form of invoice finance you choose, your customer may not be aware there is a lender involved. We cover this in more detail below.
How much can I borrow through invoice finance?
At Funding Guru, we typically offer up to 90% of the value of commercial invoices so you can immediately grow your business.
We look at your whole sales ledger across a year when assessing how much finance we can offer, meaning the amount will be based on typical sales performance rather than individual invoice amount.
Who is invoice finance suitable for?
Invoice finance is best suited to industries who sell to commercial customers. Invoices for non-commercial customers are rarely suitable for this type of finance.
Invoice finance is especially appealing for businesses who don’t want to borrow a large sum of money, as you have the freedom to both borrow against individual invoices when it suits or fund the entire debtor ledger, according to the evolving needs of the business.
The chart below shows the increasing use of invoice and other asset based finance among UK SMEs.
Who is invoice finance suitable for?
Invoice finance is best suited to industries who sell to commercial customers. Invoices for non-commercial customers are rarely suitable for this type of finance.
Invoice finance is especially appealing for businesses who don’t want to borrow a large sum of money, as you have the freedom to both borrow against individual invoices when it suits or fund the entire debtor ledger, according to the evolving needs of the business.
This chart shows the increasing use of invoice and other asset based finance among UK SMEs.
Different types of invoice financing
There are different types of invoice financing, which we detail below so you can see which is best for your business needs.
Selective invoice discounting
Selective invoice discounting, also called spot financing, lets you borrow against handpicked invoices.
You sell invoices to a finance provider such as Funding Guru for a small discount. In exchange, you get immediate access to the funds so you don’t have to wait for slow-paying customers.
By choosing selective invoice discounting, you retain full control of your internal processes and your customers are unaware of third party involvement.
You simply invoice your customer as normal, send us a copy, and we forward up to 90% of the invoice value.
When the customer pays you, you pay us back. It’s as simple as that.
Who is suitable for whole turnover invoice discounting?
- Businesses with big invoices who can enjoy the luxury of immediate access to funds locked up in pending invoices
- Firms that experience ebbs and flows of seasonal cycles and keep their cash flow consistent year round
- Businesses that don’t want to borrow against their entire invoice ledger
- Any company wanting the freedom to borrow against individual invoices here and there
Confidential invoice discounting
Confidential invoice discounting means you can borrow against outstanding invoices without your customers being aware.
With Funding Guru you have the option to set up confidential invoice discounting as an ongoing credit facility, so you are able to borrow continually up to an agreed rate.
This means that once an invoice is repaid you can borrow again – giving you the power to make decisions according to your business needs, not your cash flow.
We are able to lend up to 90% of an invoice as soon as you issue it, letting you keep cash flowing when customers are slow to pay.
Who is suitable for confidential invoice discounting?
- Businesses looking to boost their cash flow before an invoice is paid
- Those that want to retain control of internal processes including issuing, chasing and collecting invoices, and concealing the involvement of a third party
- Firms that don’t want to risk any change to a relationship with a customer
Invoice factoring
Invoice factoring means the lender will handle the chasing of invoices for you. This is an option if you don’t like the hassle of chasing invoices, or would rather spend the time elsewhere.
Invoice factoring works like the invoice finance options above. The loan provider will agree to buy outstanding invoices up to a certain percentage. For example, they may agree to buy 85% of the value of £8,000 worth of invoices – giving you an immediate cash payment of £6,800.
Fees will also be taken at this point for arranging the loan, and this will depend on the provider.
The factoring company will handle the chasing of invoices for you, and you will get the final 15% when the invoice is paid.
Who is suitable for invoice factoring?
- Business owners who don’t want to chase payments
- Firms that could do with some support from a specialist invoice finance manager. At Funding Guru, we handle invoice collections professionally and sensitively to maintain customer relationships
Pros of invoice finance
There are many benefits to considering invoice finance if your business is short on cash.
These include the below.
If your company invoices in arrears, receiving the money in advance of payments will boost your cash. You can then take advantage of purchasing in bulk or initiating expansion plans.
Businesses are ultimately at the mercy of their clients’ payment schedules. Can you really afford to wait 60, 90 or even 120 days for payment?
Invoice finance means your company can be paid in a timely fashion for services and products you have already supplied.
At Funding Guru, we make a funding decision within 24 hours so you will get a quick decision on whether you can borrow money.
Let’s face it, a customer who pays quickly is likely to get favourable treatment and build goodwill. Invoice finance means you can pay off your suppliers or creditors in good time, without having to wait for the end customer’s bill to be paid potentially months down the line.
By paying your own suppliers quickly, more will want to work with you and you have the opportunity to reduce prices and establish stronger supply chains.
Invoice finance is popular among businesses that don’t want, or don’t have the ability, to offer other assets as security against a loan. The invoices themselves are usually the only security given to a lender.
Having plenty of orders on your books and a large debtor balance doesn’t always translate into ready cash.
If your company is not able to meet payments due to HMRC, it could lead to the closure of your business in the worst-case scenario.
Invoice finance removes this worry by providing you with cash to pay your bills and keep you in business.
In an invoice finance factoring agreement, a finance provider such as Funding Guru buys outstanding invoices and takes responsibility for the collection of their payment.
Once the invoice has been paid, you are sent the remainder after advance and fees have been subtracted.
Allocating the responsibility of chasing payment frees up internal capacity at your end and removes the stress of collection.
Risks of invoice finance
While there are many benefits to invoice finance, like all borrowing you need to give it careful consideration. Below are some of the risks and cons of invoice finance.
You will pay fees and charges for invoice financing, reducing the amount you get from your client for the work you have done. If your customers don’t pay on time, you risk incurring higher charges.
If you opt for invoice finance factoring, the finance provider will step in to handle invoice payment. Their key priority is to recoup the money, so there is a chance your company’s relationship with that customer could be impacted if the lender does not handle it professionally.
At Funding Guru, maintaining customer relationships is our priority so you do not have to worry about customer relationship damage.
You may rely too much on finance, potentially putting your business at risk if customers go out of business or cannot pay the amount owed to you.
Contact Us
If you feel that invoice finance could help your business, contact us today to arrange your invoice finance solution.