Your guide to Invoice Finance

There’s a growing trend towards alternative working capital products such as Invoice Finance, as SME’s continue to face challenges trying to access capital for growth  One of the great benefits of these flexible funding products is they are a lot more accessible for SME’s than traditional bank funding, and they often suit companies that the main banks cannot support.

People are often confused by Invoice Finance and its various guises.  Here we’ll look at Invoice Finance in more detail, outlining how ]Invoice Finance works, what type of business it suits, as well as the benefits this flexible funding  can bring to a business.

Invoice finance can be a great option for SMEs that are looking to maximise cash flow.  Very simply, Invoice Finance helps a business to successfully manage cash flow and generate working capital by turning unpaid invoices from trade debtors into cash immediately.  The funder will pay the SME an agreed percentage of invoices (usually between 70% and 80%), within 24 hours.  Then, when their customer pays in full, the funder will pay the company the remainder of the invoice value, less any charges.  Every time the company raises invoices, they simply upload an invoice schedule, and can then draw down cash against the invoice values, as they need it. The funder takes an assignment of the debtors’ ledger as security and simply lends against this valuable asset.

Invoice Finance is an umbrella term for Invoice Discounting and factoring and related products.  Confidential Invoice Discounting is  widely used in Ireland, but in the last few years, other more flexible Invoice Finance products such as factoring have become popular – particularly for SME’s looking to improve their cash flow but don’t meet the financial criteria for Invoice Discounting.

So, what type of company can use Invoice Finance?  Businesses selling goods or services on credit terms to trade customers and invoicing in arrears are generally suitable.  The goods must be sold on a “sell and forget” basis and it’s important to have a good paper trail.   Having computerised systems is also key.  Funders like to see good control structures in place,  and an ability to produce management information.  All funders will have financial criteria such as minimum turnover requirements, financial strength, and minimum funding limits.  These criteria vary hugely from funder to funder, as does their attitude to risk.

Invoice finance is used by wide variety of businesses across many industry sectors, and it’s not just for limited companies ­– it’s also suitable for sole traders and partnerships.  Manufacturers, wholesalers and distributors use Invoice Finance, as well as exporters and service providers such as recruitment companies. Whether a business is a start-up, expanding rapidly, exporting or even in a restructure mode, there’s probably an appropriate Invoice Finance product in the marketplace.

Why would a company use Invoice Finance? Well, there are a number of significant benefits for companies.  Invoice finance provides a business with an instant cash injection  –  its like COD  – the business has get cash the day the invoice is raised.   With a more predictable cash flow, management time can be significantly freed up, allowing business owners to focus their energy on the business rather getting caught up in juggling the cash flow.

Invoice finance can improve supplier relationships: by settling bills on time, credit lines can be established or increased.  Business owners can often negotiate early settlement discounts for paying their suppliers quickly.  In many cases, the annual savings that can be achieved by negotiating supplier discounts, can far outweigh the annual costs associated with Invoice Finance.

One of the major benefits of Invoice Finance is that the funding is directly related to sales so as the turnover grows,  the amount of funding available grows as well.   This gives business owners the working capital they need without the hassle of having to continually renegotiate bank facilities.  Given that Invoice Finance provides a far higher level of funding than the traditional bank overdraft, it is the ideal funding solution for SME owners who are looking maximise cash potential to fund expansion and react to opportunities.

Keep an eye out for my next blog, where we’ll have a more indepth look at Invoice Discounting.