What exactly is Invoice Finance, and how does it work? Alice Cox, regional director for London at commercial finance consultancy, ABL, explains.
Invoice finance does what it says on the tin – raises finance against your invoices. However, there are different types of invoice finance, including invoice factoring, confidential invoice discounting, CHOCs (Client Handles Own Collections) and spot & selective. They all provide finance against invoices but, are run in different ways.
To explain invoice finance in its simplest form, if a business raises an invoice for £10,000 and has 60-day payment terms, the business will have to wait 60+ days to receive the payment. With invoice finance, the business could receive up to 90% of that £10,000 on the day it raises the invoice.
What are the main benefits of using invoice finance?
Being able to access up to 90% of the cash owed to a business without having to wait can help significantly improve its cashflow, and - as they say - cash is king. Invoice finance can also be used to help businesses grow, as it can make cash available to invest in new technology or machinery, take on more staff, move premises, or take on other expansion projects.
Can you give us an example of how a business might use invoice finance?
No matter how on top of its accounts a business is, it still needs to be paid and, unfortunately, that can take time. Cash in the bank may be low while a business waits on invoices to be paid and – in the meantime – will often have suppliers that need to be paid, a bill to pay to complete some work or, more importantly, staff that need paying. Having the facility to drawdown down on those yet-to-be- paid invoices can be a real lifesaver in situations like these.
What fees are usually associated with invoice finance?
There can be multiple fees and are many factors that can influence what a business ends up paying when accessing invoice finance, including things like the sector a business operates in, the quality of its customers, the type of facility the business needs, and its turnover. Terms and fees can vary depending on the lender, but two that a business will always pay is the service fee and discount charge.
The service fee is the charge associated with running the facility and is usually based on a percentage of the business’s turnover, or a fixed fee (with the former, the business may also be subject to a minimum service fee). The discount charge is the cost of borrowing, so is essentially the interest, and this will be charged on the funds the business draws down and will be accrued daily. There is also likely to be an arrangement fee which is the cost involved with setting up the invoice finance facility.
Is it a good idea to use a commercial finance consultant to arrange invoice finance?
A commercial finance specialist - or consultant – will help find the best facility for an individual business and can help to negotiate or try and waive certain fees. There are many variables that influence how a business can access invoice finance and using a consultant will help decipher and digest them all to find the best funder. Using a consultant won’t cost anything - other than a bit of your time to chat with them to ensure they can get the best facility for your business.
What are your top three tips for a business considering invoice finance?
First, pricing isn’t everything. A provider that is slightly more expensive but can provide you with a better service and facility will be worth every extra penny.
Second, be sure to understand the product fully. Invoice finance exists in various forms, so it’s important to fully understand how the facility will be set up, and then run, once it is live.
Finally, don’t be afraid to ask questions. Ask for a full explanation to understand everything, or better yet, work with a commercial finance consultant to help understand the answers and ensure you get the best possible deal.
Alice Cox is regional director for London at commercial finance consultancy, ABL Business.
If you want to find out further information about finance or talk about your own expansion plans, drop Alice an email or call her on 07884581642 to talk through your options.