If you often invoice other businesses, you may be able to secure invoice financing — one of the best ways to help with any cash flow issues.
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What is invoice finance?
Invoice finance, also known as debtor finance or receivables finance, is a financial product that allows you to borrow money — based on what customers owe to your business. This is usually in the form of unpaid invoices (accounts receivable). You might have long payment terms with your customers or sometimes payments get delayed — invoice finance lessens these risks to your business.
While invoice finance helps with the delay between you selling goods and getting paid via an invoice — purchase order finance is focused on the delay between paying suppliers and receiving the stock.
Invoice finance — considerations
Unpaid invoices can be considered as cash tied up with debtors. An invoice finance solution can help you unlock this cash and get it working for your business immediately — rather than waiting weeks (or months) for your invoices to be paid.
This cash can then be put to better use, as working capital — allowing you to cover daily expenses, purchase an asset or finance your businesses growth in another way.
Lenders can offer invoice financing on either your entire debtors book or single invoice discounting (where you have a particularly large single order and you need cash straight away).
Although invoice finance is not technically a type of business cash advance, it is a form of lending based on future revenue — namely unpaid invoices.
How does invoice finance work?
Normally the lender will pay you up to 90% of the invoice value upfront. Depending on the type of invoice finance you agree to use — the invoice can be chased up either by the lender (invoice factoring) or you the borrower (invoice discounting). The remaining 10% retention is paid once your customers settle their invoices — with the bank profiting by charging interest on monies lent to you.
Types of invoice financing
This is the product where your lender is more closely involved — as they do the “credit control”. They ensure your customer pays the right amount at the right time. This frees you up, to do what you do best as a business — rather than chasing late-paying customers. In essence you sell invoices to your lender for an agreed amount.
Invoice discounting keeps the sales ledger management in house, allowing you to retain full control of your client relationships — while still being able to get cash released quickly.
Benefits of invoice financing
- Quick access to cash already earned
- Flexible facilities on offer
- Funding grows in line with company turnover
- Reduces risk of late payments
Limitations of invoice financing
- Higher interest rates
- Process can be difficult to mange
- Often involves you insuring your debtor book
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