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What is Invoice Finance?

Invoice Finance: Meaning and Purpose

Invoice financing provides a business with the opportunity to borrow money based on what clients owe. An invoice finance facility works by borrowing against unpaid invoices, enabling businesses to access the money they are owed without delay.

Rather than waiting for the usual 10 to 90 working days to be paid, an invoice finance company can provide near-immediate access to the money owed to your business at a rate of 1.5% per invoice. After which, the full balance of the facility, complete with any associated borrowing costs, will be repaid at a later date.

How Does Invoice Financing Work?

Invoice financing for small businesses and larger organisations alike is fairly straightforward. As an alternative to waiting weeks or months to be paid by your customers, invoice finance provides access to the money you are owed right away.

Most SMEs are forced to contend with significant gaps between issuing invoices and receiving the payments they are owed. During this period, financial difficulties may be encountered as working capital is stretched to its limits.

Working with a top-rated invoice finance provider, this gap (and all association difficulties) can be removed entirely from the equation. Invoice finance costs are low and can help businesses of all sizes maintain optimum cash flow.

Typically charged at a rate as low as 3% and available to cover up to 85% of all outstanding costs owed, invoice finance is simple to arrange and comprehensively flexible.

Advantages and Disadvantages of Invoice Finance

Before setting up a business invoice financing facility, it is important to consider all the associated advantages and disadvantages. Terms and conditions vary between invoice finance providers, but the basics of invoice financing are fairly consistent.

A brief overview of the advantages of invoice financing:

  • Fast Access to Cash: Invoice financing can help you maintain better control of your cash flow and your business, providing near-immediate access to the cash you are owed.
  • No Security Needed: As you are borrowing against outstanding customer invoices, you do not need to put any security (collateral) on the line.
  • Reputation Enhancement: With invoice financing, you will never face the prospect of not being able to pay your own bills due to outstanding customer invoices.
  • Flexible Contracts: All invoice financing contracts are bespoke agreements tailored to meet the exact requirements of the business in question.

The main disadvantages of invoice financing are as follows:

  • Invoice Financing Costs: Invoice finance rates can be highly competitive, but the facility still represents a paid form of debt and an expense for your business.

Weighing up the pros and cons means determining whether the cost of invoice financing justifies the benefits you gain access to as a result. As major complications can arise due to unpaid customer invoices, invoice financing can be highly advantageous for many SMEs.

For more information or to discuss the benefits of business invoice financing in more detail, contact a member of the team at Rosewood Finance today.

Types of Invoice Finance

Invoice finance providers offer two main types of invoice financing: invoice discounting and invoice factoring. Both are designed to provide advance access to cash based on outstanding invoices, though they work in slightly different ways.

Invoice Finance

What Is Invoice Discounting?

Invoice Discounting: Meaning and Definition:

An invoice discounting facility involves the business overseeing its own credit control activities for payments made. It is a simpler type of invoice financing and involves a more hands-on approach, but it is also more resource-intensive for the business.

Invoice discounting in the UK is typically offered exclusively to high-turnover businesses of a more established nature. The invoice discounting company provides advance access to unpaid invoice costs, but it is the responsibility of the company to chase up customers to ensure they pay on time.

Invoice discounting fees and rates differ significantly from one provider to the next and are calculated in accordance with the requirements of the business.

What is Invoice Finance Factoring?

Invoice Factoring: Meaning and Definition:

Invoice factoring for UK companies is a more comprehensive solution for businesses using the facility. With an invoice factoring service agreement, the provider also provides a full credit control service on behalf of the business.

This means that the invoice factoring company itself takes care of ensuring your customers pay you on time and chase up late payments. These are effectively all-inclusive invoice factoring services, where the issuer provides advance payment on owed invoices and handles the logistics of credit control.

The benefit of this form of invoice factoring in finance is its simplicity. It is the preferred facility for smaller businesses and for those who lack the resources needed to cover their own credit control requirements effectively.

If you would like to learn more about the different types of invoice financing or have any questions about invoice financing costs, call Rosewood Finance anytime for an obligation-free consultation.

Invoice Finance Restrictions

Entering into an invoice finance agreement can be highly beneficial, but it is not without its downsides.

Restrictions to consider before entering into an invoice finance agreement are as follows:

  • Only B2B Invoices Are Eligible: With invoice financing, you can only borrow against invoices issued to other businesses, not those issued to the public.
  • Client Relationship Issues: By allowing a third party to handle your credit control activities, you place your reputation and the strength of your client relationships in their hands.
  • Longer-Term Costs: Invoice financing can be great for bridging short-term financial gaps but has the potential to become expensive when approached as a longer-term solution.

It is important to ensure you understand the potential advantages and disadvantages of invoice financing before submitting your application. At Rosewood Finance, we can provide you with the objective and impartial advice you need to determine whether invoice financing is right for your business.

Call Rosewood Finance anytime to learn more or email us anytime and we will get back to you as promptly as possible.

Invoice Financing Example

Here is a brief overview of how invoice financing works in practice:

  • 1. Local contractors have a major project coming up, which will incur greater material and labour costs than the company’s usual projects.
  • 2. Payment for the upcoming project will be issued upon completion, which means that the contractor needs to cover all the costs personally in the meantime.
  • 3. The contractor is still owed a total of £5,000 from a handful of previous clients, who, from the completion date of their projects, have 30 business days to pay.
  • 4. An invoice financing provider offers 85% of this total outstanding amount (£4,250) at a total cost of just 3% of the loan amount.
  • 5. Invoice value = £5,000; advance amount (85%) = £4,250; fees (3%) = £150.
  • 6. The contractor receives the £4,250 within a couple of days, and the project goes ahead as planned.
  • 7. When the outstanding invoices are paid, the £5,000 goes directly into the lender’s account.
  • 8. The contractor gets the remaining value of the invoice (£750) minus fees (£150), so £600.

All types of invoice financing work in roughly the same way: a lump-sum payment from the issuer to cover outstanding invoice costs, charged at a flat rate of around 3% (variable).

Do small businesses use invoice finance?

Yes, small businesses can use invoice finance to improve their cash flow. Invoice finance is a popular financing option for small businesses wishing to grow that have outstanding invoices and need to access cash quickly.

Invoice finance allows businesses spanning a broad range of sectors to leverage the cash they have tied up in their own outstanding invoices.

With invoice financing, you can tap into the money you are owed from your customers much faster, which can subsequently be used for any purpose. Plus, as you only borrow against the value of your customers’ active outstanding invoices, you never take on more debt than you can comfortably afford to repay.

What is Receivable Finance?

The term “receivable finance” is simply an international term used in reference to what we know as invoice financing in the UK. The term is used more commonly in the United States in reference to the exact same product for businesses.

Other terms used in reference to invoice financing include trade receivable financing and trade receivable finance, which in both cases refer to the same product.

Who is Eligible for Invoice Finance?

Eligibility criteria for invoice finance are comparatively relaxed when compared to most mainstream business loans. If you raise B2B invoices of any kind on a regular basis and routinely wait several weeks (or months) to be paid, you could be an ideal candidate for invoice finance.

Typical eligibility requirements include the following:

  • An established trading history, though some lenders need to see evidence of at least 12 months in business.
  • Evidence of a minimum annual turnover, which depends on the lender you work with, could be anything from £50,000 to £100,000.
  • Ability to provide copies of outstanding invoices at the time of your application, which will determine how much you are able to borrow.
  • Lenders may check the business’s credit score and financial history to assess the risk of non-payment by its customers.
  • Lenders may also assess the creditworthiness of the business’s customers to ensure that they are likely to pay their invoices on time.

Affordable Invoice Financing

At Rosewood Finance, we specialise in cost-effective invoice financing solutions for UK SMEs. All with no obligation to go ahead at any time, coupled with the objective and impartial advice of our experienced team.

Call today for an obligation-free consultation or email us with details of your requirements and we will get back to you as soon as possible.

FAQ’s About Invoice Finance

How much funding can I get through invoice finance?

Lenders calculate maximum loan sizes on the basis of several key factors and affordability checks. These include combined outstanding invoice values, the creditworthiness of the applicant’s business, the creditworthiness of their customers, the immediate financial outlook of the business, and more. Invoice finance products are normally capped at 85% of the total combined value of the applicant’s outstanding invoices at this time.

What fees are associated with invoice finance?

The fees associated with invoice financing can vary depending on the lender and the specific terms of your agreement. Common fees include service charges, interest charges, and credit insurance fees. It is important to carefully review and compare different lenders’ fees before choosing an invoice finance provider.

Is invoice finance suitable for all businesses?

As with all commercial funding solutions, invoice finance is suitable for some types of businesses, but not all. For example, businesses that regularly run into invoice disputes with customers (or have generally questionable relations with their slower-paying customers) could be taking a risk by entering into an invoice finance agreement.

What happens if my customer doesn’t pay the invoice?

In the event of non-payment of one of your own outstanding customer invoices, responsibility will fall with you to make the agreed repayment to your lender. Some invoice finance specialists offer protection facilities to mitigate such risks, which may incur additional fees.

How long does it take to get funding through invoice finance?

You may access the funds you need within 24 hours.

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