How small businesses can survive-A Guide to Invoice financing

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Ever since the global economy shrunk into a recession in 2007, businesses small, medium and large have had to become more and more resilient in order to survive. Industries have become more and more competitive and unfortunately there have been some high profile losers in every sector. This environment does however breed creativity in every sense which can be through the product or the way in which you run your operations. This has paved the way for ‘invoice finance’ a new method in which a business can obtain cash offset by outstanding invoices.

Invoice finance is a unique way to garner capital in the short term whilst waiting for debtors to pay their invoices within their agreed terms and conditions. As the economy has created such severe competition, buyers have been able to really push the boundaries with their suppliers and this has led to payment terms being pushed back to as much as 90 days for payment for the goods or service. The implications of this for business are that cash flow can run pretty dry which can impact on their ability to be able to run the business, pay overheads, salaries etc.

Invoice finance is a product that has been created to meet this need so that businesses of any shape and size, facing a cash flow problem can use their invoices as a means of borrowing money so that in simple terms, a lender will lend money up to 80% of the outstanding unpaid invoices. Lenders could be any financial organisations, even those supplying payday loans! In fact, it is estimated that 39,000 small to medium businesses now use this form of cash flow finance.

The benefits of invoice finance are that the results are immediate. Once a company has made their application, the cash can be in their bank accounts within 24 hours. Furthermore, because this type of loan is linked to direct sales, the income can be constant. As long as there are sales, there will be on-going finance. Other benefits include being able to pay suppliers early, buy in larger quantities realizing economies of scale or taking advantage of bulk buying offers. By far the biggest advantage however is that business owners do not need to worry about money and can therefore focus on driving their business forward, keeping people in employment instead of chasing payments.

There are two methods of invoice finance, invoice factoring and invoice discounting. Invoice factoring creates funds against invoices which allows full credit control. Moreover, this service can incorporate bad debt protection if required. Invoice discounting is exactly the same concept however it can be kept confidential if required.

Invoice factoring services are essentially a method of outsourcing credit management to an ‘invoice factoring’ third party services. The business signing up for this service will pay a fee to the third party, however this is arguably a small price to pay for the benefits that are realised from this transaction.

Firstly, as mentioned earlier the main advantage is being able to outsource the time and energy spent chasing people who owe the business money. This can be a stressful and frustrating process which negates from growing and maintaining the core business. Secondly, the factoring services are tied in with the amount of outstanding invoices which means that if sales increase, so does the credit on offer, therefore this service is flexible in line with business needs. Finally, the invoice factoring process is so quick that the cash is deposited into the business account within 24 hours which means that if a customer defaults on a payment, the business itself does not suffer as the cash flow situation is already taken care of.

Invoice discounting works in exactly the same way. 90% of your invoices are paid by the third party and the remaining 10 % is repaid once the actual customers pay their invoices. The difference with this service is that you, the business owner, retains control over your credit control process, which means that you continue to have the autonomy to chase your customers who have not yet paid their invoices.

Another similar feature of this service compared to invoice factoring is that the cash flow is directly linked to sales therefore if there is an increase in sales, there will be an increase in cash flow available to the business.

Confidential invoice discounting is exactly the same service, however it means that your customers will not know that there is a factoring service being provided by a third party. The percentage of invoices paid is 85%, and the remaining 15% will be paid once your customers settle their outstanding invoices. This service also provides a bank account that is accessible 24 hour s per day so that you as the business owner can check which of your customers have paid at any time. The criteria required for this service is that your business has a turnover of more than £0.5 million per year and is trading profitably.

Invoice finance is a product that has been developed to meet the needs of small to medium size businesses in order to help them manage their cash flow situation in the choppy waters of the recession. It is essentially a service provided by a third party company that pays cash against a percentage of outstanding sales invoices. The amount is usually equivalent to 90% of outstanding invoices. This means that businesses can continue to trade, wages can be paid, overheads can be met and materials can be purchased as it eliminates a cash flow problem. There is obviously a cost associated with this service but is largely thought to be offset by the many benefits.

Invoice finance is available in two different formats, invoice factoring and invoice discounting. Invoice factoring can involve outsourcing the credit control of the outstanding invoices to the finance company, relinquishing the responsibility. Invoice discounting can mean that you retain credit control however the ‘invoice financing’ service is kept confidential from your customers.

Laura Susstance is an experienced financial writer from The United Kindgom, When not writing content on a freelance basis she writes content for her payday loans review website.

1 Comments For This Post

  1. Mariah Says:

    It’s great to read articles that promote alternative financing options like invoice financing. But one form of invoice financing you didn’t mention in the article is what we do here at The Receivables Exchange. We’re a hybrid of invoice factoring and invoice discounting. Through our auction site, we connect small businesses and their unpaid invoices with a large network of buyers who competitively bid on the invoices. Sellers receive, on average, between 85-90% of the unpaid invoice. Alternative financing options like ours are available to small businesses that offer higher advance rates than the 80-85% you mentioned in this article.

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