HOW DOES INVOICE FINANCE WORK?
Invoice finance is somewhat different from traditional forms of finance. It might be easier to explain using an example. Imagine this scenario:
You’re a company who provides goods to your customers. In order to pay you, your customers raise invoices with you. However invoice financing allows you to swap around this process. If you need some capital, lenders will give it to you by buying your invoices directly from you. Then, once you’ve delivered your goods, your customers pay back your invoices to the lender directly. Everybody’s happy!
Invoice financing is also sometimes called "Factoring" or "accounts receivable financing" or "receivables financing".
HOW MUCH DOES IT COST?
You can lend up to 95% of the value of your unpaid invoices. The lenders charge a fee on top, which is a percentage of the invoice value (usually 1-5%) plus a setup fee.
The payments are taken from your business customers who pay the lender directly.
Andre runs a coffee business. He has just landed a retail deal with a national coffee chain. They will buy his stock, however the payment terms are 90 days - leaving him short of cash. He turns to invoice financing to help him.
Andre submitted an invoice worth £20,000 and his lender provided him an advance of 80% of the invoice upfront - £16,000. Fast forward 90 days later, and Andre’s customer -the national coffee chain - has paid the lender. The lender paid Andre the remaining 15% (£3,200) and kept 5% as their fee.
The national coffee chain was so pleased with Andre’s products, they became repeat buyers and business has never been better for Andre.
WHAT ARE INVOICE FINANCE LENDERS LOOKING FOR?
Your business must have:
- business customers, such as a retailer. You cannot get invoice financing if you are a business-to-consumer company.
- reputable, dependable business customers. The more reputable your business customers are, the easier it will be to get invoice financing. You’ll also be offered better rates.
WHAT WE LOVE ABOUT INVOICE FINANCING
- Invoice financing really frees up cash-flow for your business, especially when you have challenging payment terms with customers.
- Invoice finance fees are a tax-deductible cost meaning you can write them off of your business tax bill.
- Many providers offer a selective invoice finance service where you can pick and choose which invoices to have funded.
WHAT TO WATCH OUT FOR
- Your customers will be aware that you’re using invoice finance. Whilst you may prefer this not to be the case, bear in mind that this is standard practise for many retailers.
- Ensure that the lender you go with is flexible. Your business may be growing at a rapid rate and you don’t want to be stuck in a facility that doesn't grow as you do.
- Be aware of any additional rates stated on the contract which could eat into your margins. (We can help with this by going through your contract with you, to make sure you understand all of it!)