Guide to Invoice Finance
All you need to know when financing invoices
If you require Invoice Finance please fill in this form
The terms 'invoice discounting', 'invoice finance' and 'factoring' or 'invoice factoring' often get used interchangeably. However, to be technically correct, the term 'Invoice Finance' refers to any means of finance that uses the invoices you raise to your customers to generate cash. The types of Invoice Finance available - namely Invoice Discounting and Factoring - each work very differently and this is what we hope to explain here.
Why choose a Guide to Invoice Finance
Invoice Discounting
- The finance arrangement remains confidential and your Debtor never knows about it
- Finance is usually provided by a bank
- Up to 90% of the invoice is available a few days after you raise the invoice
- You retain control of your sales ledger
- Once the facility is arranged the finance available grows in line with your business without need for constant renegotiation (as would be the case with a Bank overdraft)
- Invoice Discounting is aimed at larger businesses and generally only available to companies with a turnover of £500k+
Factoring
Here you "sell" your invoice to a factoring company for an agreed discount. They then contact the Debtor to receive payment in full.
- Factoring can be both Recourse (the Factor can come back to you if a debt isn't paid) or Non-Recourse (if a debt isn't paid the Factor carries the loss)
- In essence, these companies are providing a finance, ledger management and debt collection service
- Not only does this improve cash flow but it also reduces overheads
- However a fee is charged in addition to an agreed finance discount on the invoice value
- One thing to note is that a Factor may be able to provide you with valuable credit information about your customers
- Factoring is generally available to companies with an annual turnover of £50k+ but some factors will consider start-ups
In both cases the bank/finance company will likely want to visit your premises, learn about your business and your credit control procedures to evaluate your suitability. Such checks will also be carried on periodically too.
Fees are in the form of an annual management fee (0.75-2.5% of turnover) and a per transaction charge reflected in the discount applied to the invoice (1.5-3% over Base rates, charged daily). Generally, Invoice Discounting has lower fees as you continue to manage the sales ledger and credit control yourself, and with Factoring the security that comes with Non-Recourse factoring also incurs a credit charge making it more expensive than Recourse factoring.
Frequently Asked Questions
Frequently Asked Questions
What percentage of my invoice can I fund up front?
It all depends on your business, but you can potentially fund up to 90% of your business up front. The typical figures are anything from 75-90%.
What security is required?
This depends on which Invoice Financing option you choose. If you go for Factoring or Invoice Trading then it is likely that no security is required. Invoice Discounting usually requires a floating debenture over your business.
I'm already with someone for my Invoice Finance; is it easy to switch providers?
Yes, it’s very easy and it happens all the time. There could be a number of reasons why you might consider switching to another provider. Perhaps you’re unhappy with the level of service or you’re searching for a more cost-effective deal. The good news is that despite what people may assume, switching providers is not a lengthy process.
Is it possible to get Invoice Financing for start-ups?
In some cases yes, but it all depends on your business and your projected turnover as this will be taken into consideration when going through this process. Not all providers deal with start-ups, but there are providers out there that do.
Do finance providers require Personal Guarantees?
No, not always. The finance is secured against your debtor ledger and assuming this is adequate, a Personal Guarantee may not be required.
Will it make my business look bad if I have Invoice Finance?
No, not at all. This is a common misconception. Over 40,000 UK SMEs use Invoice Financing and it merely shows that you are prudently managing your cash flow. If anything, that should give all your customers and suppliers more confidence in your business.
Is it possible to get Bad Debt protection or Credit Insurance?
Yes, one of our Invoice Financing specialists can arrange this for you, as either part of your facility or separately. It’s important that you have the protection in place, just in case your customer cannot settle their invoices.
If my business is in the construction industry, can I still get Invoice Financing?
Yes, that’s fine. For debtors overseas, international factoring (or export finance as it is sometimes referred to) is the best solution. It works in the same way, except that the UK factor works directly with agents in the country that the invoice is issued to. We have plenty of providers that will arrange Invoice Financing for overseas debtors, so get in touch with us to find out more.
My debtors are all overseas; can I still get Invoice Finance?
Yes. We have providers that will arrange Invoice Finance for overseas debtors.
How much does Invoice Financing cost?
This depends on which option you choose (Factoring, Invoice Discounting or Invoice Trading) but there is usually a facility fee of 0.5-2.5% and also a charge for the finance on each invoice (again anything from 1-3% over BBR).
What is needed to apply
Applying for invoice finance is very easy. Below are listed the things you need in order to apply.
- Eligibility CriteriaGood debtor book and ideally an established business with good credit.
- Documents RequiredFinancial statements, Debtor ledger.
- Additional CommentsOne thing to consider is 'concentration risk' i.e. if most of your revenue comes from a few clients. Not all invoice finance providers will like this but we'll guide you to one who will.
One of the biggest arms of growth in finance to SMEs in recent years has been invoice finance. There was a time when only large firms financed their invoices but now, due to increased competition, it has become available to a wide range of firms in all sectors and at all levels of turnover. the key thing is the quality of your debtor book. If you have strong customers that you are invoicing then lenders will queue up to fund you, meaning you get better rates. Call us on 01494 410 125 to discuss.
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