Cashflow – Life After Lockdown

With the UK government easing the “lockdown” on a weekly basis so that more businesses can start to operate again I have taken the opportunity to look into one of the areas of finance that business can use to assist with cashflow, namely invoice finance. For the relevant businesses invoice finance can work alongside any CBILS, BBLs or CLBILS funding that they have (or will) secure. The following provides an overview of the key points of invoice finance.

What is Invoice Finance?

Invoice finance is the provision of funding secured against unpaid invoices. It is a term used to describe both invoice discounting and invoice factoring.

Why use Invoice Finance?

Invoice Finance is a way for a solvent, operationally sound business to improve their cashflow by securing funding against unpaid invoices.

If a business sells to another business, either services or products, on credit, utilising invoice finance provides the opportunity to quickly realise the cash value of the sales invoice. From recruitment businesses to manufacturers, if the business has a sales ledger, and it is business to business, then invoice finance could be the ideal method of generating available working capital that you have been searching for.

If the following 3 criteria are met, then invoice finance is an option.

-       The business is UK based

-       The business transacts B2B

-       The business is paid on terms or raises invoices, timesheet, applications or purchase orders.

Finance companies will provide funding for an agreed percentage of an invoice, usually within 24 hours of the service or product having been provided. The remainder is due, once the invoice has been paid by the client, minus the finance companies fee.

This can be extremely useful for a business’s cashflow when debtors have payment terms of more than 30 days or for businesses whose growth is hampered by slow payment of invoices. Consistent cashflow is a major benefit to any established or growing company.

Accessing the money held in unpaid invoices improves cashflow and allows businesses to complete a range of actions without having to wait for their invoices to be paid. These include;

-       introducing working capital

-       taking advantage of opportunities such as early payment discounts with suppliers

-       increase stock to support sales growth

-       paying wages

Invoice Factoring vs. Invoice Discounting

As mentioned at the start, invoice finance is the collective term for both invoice factoring and invoice discounting. The essential differences between invoice factoring and invoice discounting lie in who takes control of the sales ledger and responsibility for collecting payment, and the level of confidentiality.

Invoice factoring is sometimes referred to as ‘factoring’, or ‘debt factoring’. It is a financial product that enables businesses to sell unpaid invoices (accounts receivable) to a third-party factoring company. The factoring company buys the invoices for a percentage of their total value and then takes responsibility for collecting the invoice payments.

Invoice factoring is an increasingly popular form of alternative business funding. This type of alternative finance has grown in popularity since it has become more challenging for businesses with imperfect credit to use traditional finance products from high street banks.

Invoice discounting has essentially the same benefits as factoring and involves most of the same features, but it is a confidential process and for some businesses this confidentiality is seen as an important gain and therefore they prefer discounting to factoring. 

Unlike with invoice factoring, the invoice discounting process relies on the company that issued the invoice pursuing the recipient for payment. Under these circumstances, there is no need for the recipient to be made aware that their invoice has been sold.

Before a company makes the decision on whether to use an invoice finance facility, they should consider the following.

-       Does invoice finance provide extra flexibility?

-       How it compares to an overdraft.

-       If the peaks and troughs of sales provide enough cash to pay suppliers and overheads.

-       The overall costs including, monthly charges, discount fees and any annual minimum fee.

-       The minimum length of contract and notice period.

Invoice Finance Costs

Each invoice finance company will have their own position on charges for their facility and the following are the most common.

Service Charge / Facility Fee - The cost of  having the facility, this is usually calculated as a percentage of turnover and the charge that is most likely to differ between providers. Discounting fees are likely to be lower than factoring fees.

Discount Charge - The cost of the borrowing itself. For each invoice funded, there is a small finance fee charged in the same way that there is interest on a loan. This is normally a few percent and covers the time between you receiving the funds, and the finance provider being paid back from the cleared invoice.

Apart from these main costs, there can also be other costs that vary from lender to lender including charges to end the agreement early, because some are agreed over fixed terms, or there could be additional services as part of the facility such as CHAPS fee, trust account fee and there may even be an arrangement fee.

How a Commercial Finance Broker Can Help

It is at this point that a commercial finance broker’s experience and knowledge of the whole market will save business owners time and effort in obtaining the options available. A good commercial finance broker will have a panel of funders to review providing a range of possibilities for a business to choose from.

If you would like to know more about invoice finance either as a company considering this for the first time or to check if your existing invoice finance facility is still competitive contact [email protected] or call 0161 956 2656.