Invoice finance is a type of business funding where a company sells its unpaid invoices to a third party (such as a bank or finance company) for an advance payment. This allows the company to access the cash tied up in their invoices immediately, rather than waiting for payment from their customers.
What are the types of invoice finance?
There are two main types of invoice finance: invoice factoring and invoice discounting. With factoring, the finance provider takes over the credit control function and chases payment from customers, while with discounting, the business retains control over their credit control.
How does invoice finance work?
The business first raises an invoice and then submits it to the invoice finance provider. The provider then advances a percentage of the invoice amount (usually around 80-85%) to the business, with the remaining balance paid once the customer settles the invoice. The finance provider typically charges a fee for this service, which is deducted from the remaining balance.
Who can use invoice finance?
Invoice finance is suitable for any business that issues invoices with payment terms. It can be particularly helpful for small and medium-sized enterprises (SMEs) that struggle with cash flow due to long payment terms or late-paying customers.
How much funding can be obtained through invoice finance?
The amount of funding available through invoice finance depends on the value of the invoices being financed. Typically, businesses can access funding up to 80-85% of the invoice value.
How long does it take to receive funding through invoice finance?
Funding through invoice finance can typically be obtained within a few days of submitting the invoices to the finance provider, although this can vary depending on the provider and the complexity of the financing arrangement.
Is invoice finance expensive?
Invoice finance can be more expensive than other forms of business financing, such as traditional bank loans. However, the cost can be offset by the benefits of improved cash flow and reduced credit risk.
What are the benefits of invoice finance?
The main benefits of invoice finance are improved cash flow, reduced credit risk, and increased working capital. It can also provide businesses with access to funding that they may not have been able to obtain through traditional financing routes.
What are the risks associated with invoice finance?
The main risk associated with invoice finance is that the finance provider may not be able to recover the outstanding invoice amounts from customers. This can result in the business having to repay the advance payment and pay additional fees.
Can invoice finance be used in conjunction with other forms of financing?
Yes, invoice finance can be used alongside other forms of financing, such as bank loans or overdrafts. However, it is important to ensure that the financing arrangements are structured appropriately to avoid any conflicts or complications.