Invoice finance can be used to access cash quickly while you wait for customers to pay you. Whether you need to pay suppliers or employees, or reinvest to grow your business, invoice financing can be a quick way to boost cash flow.
If you’re regularly sending invoices for work you’ve done, you’ll be well aware of the challenges of chasing overdue invoices and managing your finances while you wait for payment. And depending on your payment terms, you could be waiting 30 days or sometimes up to 90 days for a client to pay you after work’s been completed.
Here’s how invoice financing can help your business manage cash flow.
Invoice financing is a short-term way to plug the gap between invoice payments and boost your cash flow. It essentially allows you to sell your unpaid invoices to a third-party, who will then lend you up to 95 per cent of the value of those unpaid invoices up front.
It’s an alternative to getting a business loan, and can be a quicker way to access cash. However, invoice financing isn’t without risk in the long-term, so read on to understand more about whether it’s right for you and your business.
There are two types of invoice financing:
The lender will have control of chasing invoice payments and can credit check potential customers, giving you more time to focus on running your business. This does mean your customers will know you’re using a finance provider though, so make sure you’re happy with the lender’s approach.
Usually the lender will loan you 70 to 85 per cent of the invoice up front, and pay you the remaining amount (minus interest and fees) when the customer pays the invoice.
If you have an unpaid invoice for £200, you'll receive £140-£170 up front from the lender and then approximately £30-£60, minus any fees, once the invoice has been paid.
This is intended for businesses with higher turnover, offering them more control (but greater admin) as they’ll be responsible for chasing payment.
Here you can get an advance of up to 95 per cent of the invoice amount, with the rest paid (minus interest and fees) when the customer pays.
If you have an unpaid invoice for £500, you'll receive £475 up front and then the remaining £25, minus any fees, once the invoice has been paid.
Another option is to use ‘select invoice finance’ or ‘spot factoring’. This allows you to select which invoices and customers you want funding for, so you only use the lender when you need to.
Select invoice finance – choose which customers you want to finance (for example, if you have a client that regularly fails to pay invoices on time).
Spot factoring – choose which invoices you want funding for (for example, a large project with expensive materials, or invoices with longer payment terms).
Be aware that there’s usually a monthly cost associated with invoice financing. Other costs to look out for include:
Some of the advantages to using invoice finance include:
If you’re considering invoice finance for your business, make sure you’re aware of some of the drawbacks and long-term implications, too:
Business finance is complicated, so you should speak to a financial advisor or invoice finance broker if you’re unsure about anything.
Is there anything else you’d like to know about invoice finance? Let us know in the comments.
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