Using your customer base to improve your cash flow: Introduction to Invoice Finance

When we speak to business owners we often hear that the biggest challenge they face is cash flow. This is more often than not due to unpaid invoices. We have found it surprising how business owners come to us unaware that there is a solution out there. The answer is; Invoice Finance, also referred to as Invoice Discounting.  

So what is Invoice Finance?

Invoice Finance is simply when a business ‘sells’ an invoice to a third party finance provider. This can be a single invoice or the full debtor book. The finance provider will pay the business up to 90% of the value of that invoice upfront, with the remainder being paid as per normal trading terms minus lender fees. This advance enables the business to leverage their sales ledger, increasing the cash moving through the company and injecting cash into their working capital.

How does it all work?

Once the customers pay their invoices, the lender provides the remaining balance, minus their fee. Companies using invoice finance can get hold of their money typically within 24-48 hours of creating an invoice, meaning they have a rolling cash flow throughout the month, rather than waiting for customers to pay within their 30-, 60- or even 90-day payment terms!

We have outlined what we believe to be the key pros and cons:

Pros:

  • Improved business cash flow & cash lump sum released - when you first start using invoice finance you can release a large proportion of the cash that is tied up in your unpaid sales invoices.
  • Funding grows with your business - the more invoices you raise the more funding is released unlike a traditional bank overdraft or loan where the funding is a stated amount.
  • Confidentiality - It is often available on a confidential basis so that your customers are not aware that you are using an invoice discounting facility.
  • Control of customer contact - with invoice discounting you retain the credit control and invoice collection function for your business in-house, so you remain in control of the contact with your customers.

Cons:

  • Cost - there is a cost to use this finance service. It is worth shopping around before deciding. You can also offset the cost against having improved cash flow which can mean being able to demand discounts from suppliers.
  • Minimum charges - some invoice discounting facilities will have minimum monthly or annual charges. These vary dramatically between different providers and there are also specialist invoice discounting facilities that do not require you to pay any kind of minimum charge and still allow you to collect your own invoices.
  • Contract length & being tied in - many invoice finance companies will require a minimum contract length and lengthy notice periods. Again this is not universal and you need to shop around. Some invoice discounters offer very short notice periods for termination of the facility.
  • You don't have help collecting your sales ledger - unlike factoring, invoice discounting does not provide you with a credit control function to help you collect your unpaid sales invoices.
  • Set up process - in some cases the setup process for invoice finance can be lengthy and complicated. Again this is not universal and there are significant differences between different companies.

Upon review of the ‘cons’ list, many of these are avoidable/manageable with an active accountant on board. We work alongside our clients to offer a helping and guiding hand with these services. If you are struggling or would simply like further advice about how this could transform your business then get in touch today. Phone – 01284 770427 | Email – accounts@abbeygateaccountancy.co.uk

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