Invoice Finance

Invoice finance allows businesses to free up space in their balance sheets, and helps commercial organisations to grow by streamlining their cash flow

With any business it’s vitally important to stay responsive, and without the ability for a company to maintain a stable and healthy cash flow it is impossible for them to grow and expand. Because businesses rely so heavily on their finances, an innovative form of funding known as invoice financing has been developed that enables companies to generate income quickly and reliably. By empowering businesses to take control of their balance sheet, invoice finance providers enable commercial expansion by providing fast, stable funding that businesses can rely on.

This article will deal with the reasons why invoice financing is such a powerful tool, and how it can help businesses to liberate their cash flow. As with any financial product, it’s important to fully understand the costs and implications before proceeding, and anyone considering invoice finance as a solution for their business should consult their financial adviser beforehand.

Commercial Cash Flow and Invoice Financing

As any B2B business owner knows it isn’t enough to count on your customer to pay up immediately. The generous payment terms of most invoices allow customers to delay payment for several weeks, and many businesses will do exactly that; they may do so for a number of reasons, from cash flow management to payment structuring to sheer absent-mindedness. In any case, this can be exasperating for a business which is depending on getting paid in order to keep up with the costs of running a business. Because of this continual payment gap between goods being produced and payment being received, there is always an amount of uncertainty about the funds that a company can count on, and it’s an unwise (and overly optimistic) manager that relies on an invoice payment to meet operating costs.

Because a business can’t rely on a steady and predictable source of income from the payment of its invoices, it must ensure that it can still meet its day to day running costs. This means they need to keep capital on hand to ensure that staff will be paid and purchase orders fulfilled even if their own customers are slow to pay, but this is hardly an ideal situation. The capital that’s sitting in a bank account just in case it’s needed could be much better invested in upgrading the business itself, where it can actually help to turn a profit.

Invoice Finance

Clearly, businesses are crying out for a solution that allows them to ensure their operating costs are taken care of without having to maintain hefty bank balances. The answer lies in invoice finance, an innovative financial solution that promotes flexibility and stability, while also bridging the gap between invoices coming due and payment being received.

Invoice finance is a fairly simple concept that elegantly solves the problems inherent in the invoice payment system. An invoice financier will essentially “buy” an outgoing invoice from their client for a high percentage of its value (depending on the specific deal, this can be for as much as 95%). The client business receives the money immediately and is free to invest it in their business as they wish; they can purchase new stock, finance upgrades, meet costs or invest in new premises, just as they would when receiving any invoice payment.

The business issues the invoice as usual to their customer, with the usual terms, and the customer will then pay the invoice within this timeframe as usual. Upon payment, the invoice financier will give their client the remaining outstanding balance from the invoice, and reclaim their initial loan. The lender will charge either a standing commission per invoice, a percentage charge or a monthly fee to cover their costs, depending on their particular fee structure.

Invoice financing is perhaps best illustrated with an example. For instance, let’s say a business has fulfilled an order for £10,000 and draws up the invoice for their customer. Before they send it they notify their invoice financier, who will immediately give them 80% of the invoice’s value. This means the business gets £8,000 up front, which they can spend as they wish, and they then send the invoice to their customer. Within the next 30 days, their customer pays up the full £10,000, of which £2,000 is paid to the first business and £8,000 is paid to their invoice finance provider. The first business has therefore kept the full £10,000 of the invoice, with the majority of it paid straight away, while the invoice provider has made their initial loan back. Depending on the deal, the invoice provider will make their profit by charging their client for their services either as a percentage of each invoice or as a monthly fee.

Invoice Financing and Reclamation

There are many different variations and types of invoice finance scheme, and some of these can be highly integrated into a business’s strategy. At its simplest, an invoice financier will only act as a third party and will have no involvement with either the invoice or their client’s customers. However, some lenders offer a full invoice payment service which is completely integrated into their client’s businesses, effectively acting as an accounts department. In these cases, the lender will generate and dispatch invoices, and will also chase customers for payment.

Benefits of Invoice Discounting

There are many advantages for businesses who use invoice discounting services. The ability to plan ahead and react to changing marketplaces is invaluable, and because invoice discounting enables businesses to create a stable and reliable income structure it can let business leaders plan confidently for the future. Without invoice finance, a business must maintain a significant pot of capital to keep up with day to day expenses, which not only minimises their ability to invest and upgrade, but also restricts the opportunities they can take advantage of. Being fast to react and financially agile is essential for a business’s success, and invoice financing is, for many commercial ventures, a crucial component of success.

Frequently Asked Questions

What is a bridging loan?

A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.

What is a business bridging loan?

A business bridging loan is a type of commercial loan that allows you to borrow money quickly over a shorter period than a typical bank loan but usually at a somewhat higher rate.

What can a business bridging loan be used for?

A business bridging loan can be used for a huge variety of different purposes. Most commonly they are used for major purchases such as property, for new equipment and machinery as well as to acquire stock. They can also be used as working capital and by new businesses that require a cash flow injection.

Can a business bridging loan be used to resolve short-term cashflow issues or to meet other liabilities such as tax?

Yes. They can be a great way for small, medium or even large businesses to secure a cash injection. Securing business finance from a traditional lender can be challenging as High Street lenders usually want to review a business’s past performance by way of profit and loss accounts for the preceding years. Whilst traditional lenders will put businesses through rigorous stress tests bridging lenders will focus instead on each business’s ability to repay the loan not past performance. For bridging lenders, the asset being used as security and the exit strategy are key.

What can be used as security against business bridging loans?

 A vast majority of businesses will use property or land as security when taking out a bridging loan. There are however a small number of specialist lenders that are prepared to secure bridging loans against equipment, the value of unpaid invoices and projected future sales or even against equity in the business.

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