Invoice financing is a mechanism offered by a number of financial providers and is a way of improving short term cashflow in a business. It is especially useful if a business has a number of slow-paying clients, without necessarily having the resources to chase payments. If this mechanism is new to you, we have put together some of the most frequently asked questions in order to help you compare invoice finance terms offered by different providers, and make the best decision for your business.
It is important to note that when you use invoice financing, there will be fees payable, meaning you will not receive the full amount of cash from each invoice.
Invoice financing is, in effect, a short term loan, borrowed against the value of unpaid invoices in your business, providing an instant cashflow injection. Typically, lenders will release up to 90% of the value of the unpaid invoices immediately, with the rest released once the invoice has been paid. The lender will retain their fees and any other charges at this point.
There are a range of different types of invoice financing available, so it is important that you make a careful search and perform a thorough invoice finance comparison to ensure you are selecting the best deal for your business.
There are two main types of invoice financing products available, invoice factoring and invoice discounting.
Invoice discounting involves you sending specific invoices to the finance company for them to chase. This could include anything from historic slow payers to large invoices that you want to ensure come in, or any combination of your invoices you choose to send over.
Invoice factoring is the practice of providing your entire invoice ledger to the finance company, for them to receive and process payments. In small businesses in which turnover has grown rapidly, this may be a way to delay the setting up of your own accounts payable team.
Invoice discounting usually provides payments for each invoice within a day of the invoice being sent to the finance provider, and each invoice will be charged for separately. Invoice factoring will be generally settled on a monthly basis, but there are different options available from finance providers.
Typically, providers will charge between 2% and 5% of the invoice amount. When making an invoice finance comparison, it is important to look carefully at the rates offered and whether there are any discounts or other incentives available. Likewise, rather than a percentage amount, some invoice financers will charge a set transaction fee, so check the terms and conditions carefully.
Compare invoice finance for different business types
Invoice financing is available for businesses of all shapes and sizes.
Small businesses can be harmed by late payments, given their scale. Quick cashflow is often necessary in order to purchase more stock or materials, and late invoices can impede this process, with the result that the business could grind to a halt. Using invoice financing in this sort of business can help owners to plan their financial future with some degree of accuracy.
Larger businesses will benefit from the continuous cashflow from some of their larger clients, ensuring that business keeps moving through tough times and that late payments do not affect the running of the business in a negative manner.
In seasonal businesses, cash flow when times are good can help to cover the leaner periods. During the busier times, there may not be time to chase payments. Invoice financing can alleviate this pressure, leaving your team free to focus on revenue generating activities.
This depends on the finance provider. Some providers will offer a completely confidential service, meaning that your clients will know no difference. Other providers will want to protect themselves by verifying your clients. In some cases, having an invoice finance provider make contact with your clients can expedite payment.
Advance fees are often charged at around 3% of the value of each invoice. This will, of course, vary by finance provider. Finance providers may decide to charge more if your company has a poor credit history or is seen as less financially secure.
Additional fees could be chargeable based upon exchange or transaction fees, whilst discount fees could apply if early payment offers are made to clients. Be sure to read all terms and conditions carefully in order to understand precisely what any additional fees may be with your account.
You should also make yourself intimately acquainted with all invoice finance providers’ policies on late repayments from clients. You should be aware as to whether there are any penalties payable if your clients fail to make a payment.
When you compare invoice finance providers and their offerings, it is worth reviewing all repayment terms in detail. Different companies will have their own policies, but in the event of the client paying you rather than the finance provider, you should notify them immediately and transfer the funds as soon as possible into the correct account.
When you have financed an invoice, most of the money will be released, often on the same day, and fees will be payable to your finance provider when the invoice has been paid in full.
Invoice factoring involves signing over your entire invoice ledger to be managed by the finance provider. In these cases, your monies will be paid to your account on a monthly basis, less any fees payable to the finance provider.
On a short term basis, invoice financing will be the more expensive option, but it often comes without any requirement to run for a specific amount of time. Invoice factoring may be cheaper in the long run, but will come with a contracted term.