Invoice finance is one of the most attractive forms of alternative funding. As small business owners increasingly look away from the banks to fulfil their finance needs, routes such as invoice finance provide flexible, affordable means by which small business owners can get the cash they need.
But what is invoice finance, and is it the right alternative funding method for you?
What is invoice finance?
The term ‘invoice finance’ describes a series of techniques, known as ‘invoice discounting’ and ‘factoring’, by which you might raise money against the value of your unpaid invoices. The process is a simple one. To begin with, you raise an invoice in the normal way. You then pass this invoice on to a third party invoice finance company, sometimes known as a ‘factor’. This third party will then pay you the face value of the invoice, less an administrative fee. Then, depending on the sort of invoice finance arrangement you undertake, you will either chase the invoice yourself in the normal way, or you will pass this responsibility onto the invoice finance company. When the invoice is settled, the invoice finance company gets paid.
What are its advantages?
There are several key advantages to invoice finance that mean it could be the most attractive form of alternative funding. The first of these is cashflow. Late payment is a severe and growing problem for many of the UK’s small businesses. It is becoming increasingly difficult to get an invoice paid on time, and invoice ageing periods are on the rise. Invoice finance removes this worry, as the invoice finance company will often pay your invoice within as little as 24 hours. In addition, it is often possible to receive as much as 95 per cent of the face value of the invoice.
The second major advantage is resourcing. Chasing invoices takes up a lot of time, but with some invoice finance arrangements you can free yourself from this burden. If you choose a factoring arrangement, the third party will assume responsibility for chasing the invoice. This can leave you free to get on with running your business.
Just as importantly, using invoice finance it is very difficult to borrow more than you can safely afford to repay. As your borrowing is based on the value of your sales, your credit facility expands and contracts with your business.
Finally, invoice defaults pose yet another major problem for small businesses. A single default can be financially crippling, but with invoice finance you can often protect yourself against these eventualities with bad debt protection. This is generally available in both invoice discounting and factoring arrangements.
What are the alternatives?
It is important to note that invoice finance is not the only so-called alternative funding method. Aside from the banks, there is a range of other ways in which you might get the cash that you need. These include crowdsourcing, equity finance, government grants, and angel investment. More information about all of these options is available elsewhere in our Knowledge Centre.