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The Ultimate Guide to Invoice Finance

It’s thought that a third of UK SMEs have limited or no understanding of how invoice finance works, so if you want more information on invoice finance, here’s a guide to how it can work for businesses, from the different types of invoice finance to the advantages and disadvantages of the process!

What is invoice finance?

Over 95% of private businesses in the UK are made up of SME (small to medium enterprises) with over 55% of them struggling with cash-flow. Invoice Finance is an asset-based form of lending which means that’s assets such as machinery or stock can be collected if there were to be a default on repaying the facility. Invoice finance aids with boosting cash flow and therefore commonly increases turnover.

The way this is done is the financier will advance money against unpaid invoicing on the sales ledger.  Typically, advance rates will be up to 90% of the invoice value. This is for B2B (business to business) registered in the UK from start-ups through to corporations. The largest corporations in the UK will use invoice finance on a confidential basis so the customers are unaware of the financier’s involvement. It can release large amounts of working capital for a business and open up the market for SME’s who are looking to work with corporates or grow the business. Think of it as a continual cycle of short terms loans to aid cash-flow.

What are the different types of invoice finance?

There are 2 forms of invoice finance. Invoice factoring and invoice discounting which accommodate business differently. Let’s look at factoring to start off with. This can be accessible for start-up businesses and SMEs to reduce workload and give them the financial backing to grow. The finance company will collect in the outstanding invoices by administering credit control and advance money against outstanding and future invoices.

Invoice discounting is reserved for the larger more established business with a minimum turnover of £300k. The business would administer the credit control and a trust account is set up for payments to go into. This is an account that is set up by the finance company, purely to receive payments of invoices. Many people think of invoice discounting like a series of short term loans. The financier gets a figure or list of invoices that you have raised and then loans or advances money against these.  It’s the most simple and low touch form of invoice finance. When used to its full potential can dramatically increase turnover and grow a business.

What is selective invoice finance?

Selective invoice finance allows a business to control what particular invoices they would like funding on. The business can decide if they require funding on all the outstanding invoices or none at all. This can not only support seasonal businesses with busier and quieter times but those who are looking to grow quickly. The financier typically will have an online portal that allows a business to upload invoices and receive payment. This a very flexible form of invoice finance.

What are the advantages and disadvantages?

Previously a few advantages have been raised with the main one being a boost and support to cash-flow. This is because it negates B2B having to wait to get paid 30,60 even 90 days to get paid. Instead, having 90% of the value of the invoices released in 2-3 days. Furthermore, it allows the SME market to compete and trade with a wider and more diverse range of clients as they can sustain longer credit terms. This in turn will increase turnover allowing a business to scale up. Construction, recruitment, and domiciliary healthcare finance utilise factoring or invoice discounting commonly.

The disadvantages and considerations to make when using invoice finance are to be clear on how you will collect payment if you choose to administer credit control yourself. Also, manage how much funding you require at points throughout the year. An example would be £100k may be available to you but do you require all £100k all the time or is it more beneficial to stagger the funding required.

What do I need to get an invoice finance facility set up?

For an application to be considered by the financier and indicative terms presented they will look at the following. As a minimum for a new start business, the following will need to be ready. A copy of a bank statement, business plan, projections for 12 months, and any outstanding invoices will allow the financier to assess the level of funding required. For a more established SME, 3 months bank statements, a copy of any annual accounts, sales ledger, and a creditors ledger will allow them to get an initial insight into the financial performance of the business. Remember the more information supplied in the initial stages the stronger the application will be allowing for a more competitive pricing. The best practice is to gather all required information prior to applying.

Then when the financier requires this information not only is it accessible but current. Typically, it takes 1-2 weeks to get an invoice finance facility set up. However, this can be shorter depending on time scales.

Get in touch with Pinnacle Business Finance Today

Invoice finance can be a complex subject with lots of jargon and technical terms. We hope that our ultimate guide has helped to introduce you to the subject! For more help and information on Invoice Finance, please get in touch with the Pinnacle Business Finance team today.

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