Running a business can come with many challenges. Planning for growth whilst managing cash flow can be a difficult balancing act, especially when faced with the looming pressure of delayed customer payments, no matter how brief they are.
In this blog we explore a type of funding solution called Invoice Finance. We delve into what is it, how it works and the benefits it can bring to your business.
What is Invoice Finance?
Also commonly known as invoice factoring or invoice discounting, ‘IF’ allows businesses to unlock cash tied up in unpaid invoices, providing immediate access to funds. It can help to alleviate cash flow pressure and provide a welcome boost to cash reserves.
How Does it Work?
There's a wide range of Invoice Finance providers right across the UK and each one follows a similar five-step process:
Step 1: Invoice Issuance - You provide goods or services to your client and issue an invoice for payment.
Step 2: Invoice Submission - Instead of waiting for your client to settle the outstanding debt, you submit a copy of the associated invoice to a specialist lender.
Step 3: Advance Payment - The lender then advances you a significant portion of the invoice value within 24 to 48 hours. There are a number of factors that impact the exact percentage of funds you can get in advance - such as your business sector and the creditworthiness of your client - but most providers will typically advance from 70% to 90% of the invoice value.
Step 4: Client Payment - Your client pays the outstanding invoice amount directly to the lender, within their agreed payment terms (e.g. 30 days).
Step 5: Final Payment - Once the invoice is paid in full, the lender releases any remaining balance to you, minus any fees.
Benefits of Invoice Finance
This flexible and cost effective funding solution can offer several benefits including:
Flexibility: As the overall credit limit is linked to your underlying debtor book, the facility can flex to accommodate increasing cashflow pressures. As your sales ledger grows, your access to funding does too.
Risk Management: Lenders often perform credit checks on your clients, reducing the risk of late or non-payment. Some finance providers can also take on the credit control and collections process - known as factoring - meaning you can free up capacity within your team and focus on running your business.
Scalability: Whether a startup or an established business, your facility can adapt as your funding needs evolve. It can support your business during periods of rapid growth or help to alleviate seasonal fluctuations.
Whilst Invoice Finance offers numerous benefits, it may not be suitable for everyone. In the majority of cases, lenders will only fund invoices where the work has already been delivered or completed. This can make it difficult for businesses that issue invoices in advance (staged payments, applications for payment etc) to access this type of funding. However, there are several specialist lenders in this space.
In Summary
So, there we have it - a short overview of Invoice Finance!
Whilst there are considerations, this innovative funding solution can be a valuable tool for managing cashflow. By unlocking the capital tied up in your invoices, you can mitigate the impact of delayed or late payments. With the right approach, Invoice Finance can serve as a valuable funding solution to help your business manage cashflow and drive for growth.
Whether you're looking to learn more about Invoice Finance, review your current facility or access additional cash for growth, get in touch with the team at KeySME Business Finance - We're here to help #UnlockYourPotential!
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