A Guide to Invoice Finance

If you’re a business owner or entrepreneur and are looking for ways to access additional capital to help you grow your business, consider Invoice Fiance. Invoice Finance can be an effective form of a loan for certain types of businesses. This type of lending allows a business to capitalise its balance sheet and maximise available funds.

What is Invoice Finance? 

Invoice Finance (also referred to as invoice financing) is a form of a loan. It functions as a short-term loan that allows a business to borrow funds against the amounts owed to the company from their outstanding (e.g., unpaid) invoices. Invoice Finance is essentially an advance on funds that a business will eventually receive once the company’s customers pay those invoices. This type of finance can improve and increase a company’s overall cash flow. Invoice Finance is a type of debt instrument that provides access to more working capital at a faster rate than if a business waits for their invoices to be paid by their customers and business partners. Companies can use this early access to additional capital to address immediate expenses such as paying suppliers and staff, as well as using the funds to grow and scale a business. There’s no such thing as free lunch. Lenders charge a fee to businesses who use Invoice Finance services. The fee is generally a percentage of the amount of each unpaid invoice.

Other Terms Used to Describe Invoice Finance

There are multiple terms to describe the concept of Invoice Finance. Here are some of the other names. Please note that in the UK it’s more common to say “finance” or “arrange finance” when referring to a loan. In the US “financing” or “financed” is the preferred lingo. Below are examples for each country. UK example: “The Coronavirus Business Loans Interruption Scheme (CBILS) is designed to help small and medium-sized businesses access finance.” US example: “Wells Fargo financed the $8m senior loan for Cog Company.”

Different ways to Say Invoice Finance and Different Types of Invoice Finance

• Invoice Finance or Invoice Financing
• Receivables Finance or Receivables Financing
• Accounts Receivable Finance or Accounts Receivables Financing
• Invoice Factoring – sub-product
• Invoice Discounting – sub-product
• Selective Invoice Discounting – sub-product

What Types of Businesses are Best-Suited for Invoice Financing?

Not every business is suited for Invoice Finance. Invoice Finance is typically utilised across the following industries:

• Construction
• Clothing and Apparel
• Healthcare
• Logistics
• Manufacturing
• Pharmaceuticals
• Printing
• Recruitment, Staffing and Temp Job Agencies
• Transportation
• Wholesale & Distribution

What do all of these sectors have in common? They all provide goods or services to large customers who are different than an individual everyday consumer. Large customers don’t pay immediately in exchange for goods. Their customers purchase on credit and typically pay invoices within 30 days.

What Type of Invoice Finance is Best for my Business?

There are multiple types of Invoice Finance that each work slightly differently. Here are the types:

• Selective Invoice Finance

Rather than a lender essentially buying the debt owed to a based on the amounts of the invoices, a lender will provide a business with a loan against the total number of the unpaid invoices and charge an interest rate in exchange for giving the business the loan. Before proceeding with this option, a company should carefully consider the interest rate of the loan to determine if this type of finance (also known as a loan) makes sense for the business. Typically a business will receive a larger upfront amount (on a percentage basis) compared to the Invoice Finance option as the business is still responsible for collecting the amounts owed to them. Selective Invoice Finance A third option is Selective Invoice Finance. With a Selective Invoice Finance structure, a business only collateralises a certain number of invoices due rather than all of the invoices due. For example, if a company has ten outstanding invoices for £10 per invoice, a lender may offer to give a business £85 today for the invoices. Once they collect the full amount owed on each invoice the lender will send the business the remaining amount less their fees and interest. But what if a business doesn’t need £85 today? If a business has limited capital needs, Selective Invoice Financing may be the right choice. A business can choose the number of invoices and which customers to give to the lender to collect. To help businesses adversely affected by the COVID-19 pandemic, the UK government has introduced a government-backed scheme called CBILS, that provides companies with access to different types of loans, including flexible selective Invoice Finance loans in the form of a CBILS revolving credit facility. In addition to offering debt backed by an 80% guarantee by the UK government to the lender, the government will assist companies by paying the service/subscription fees and the interest for the first 12 months. This is helpful for businesses as it alleviates some of the financial burdens as businesses get back to work as lockdown restrictions ease. While the government is incentivised to help businesses they won’t foot the bill for everything. In the case of a default when a business cannot collect on an invoice the lender will charge a fee for the inconvenience. In this situation, the borrower is responsible for paying the fee. For loans under £250,000, there is no personal guarantee requirement, although in certain instances a lender may take a debenture. If your business is experiencing decreased cash flows due to the COVID-19 pandemic and customers who are taking their time to repay you, a CBILS Invoice Finance facility is worth considering. Monthly interest rates on these types of loan facilities are typically (but not always) between 0.55% and 2.5%. Businesses should contact CBILS accredited lenders who specialise in providing Invoice Finance to explore their options.

Conclusion 

As a business owner, you should consider Invoice Finance options whether you need funds to bolster your business or bounce back from the coronavirus pandemic. The world will continue to move forward and businesses should seek opportunities to juice their balance sheet where possible. The additional capital can allow organisations to innovate, pivot, adapt and move forward.