The basics of invoice finance are simple. When you provide goods or a service to a customer you issue an invoice. That customer will take time to settle your account yet you have to meet the costs involved in providing those goods and services before you receive payment. The funds required to fill this gap are called working capital and this is generated by owner investment or retained profits.
If a business is new, or is expanding fast, the need for working capital outstrips these resources and it becomes necessary to find the money elsewhere. If you need to borrow it commercially assets are required as security and often the obvious ones are those causing the cash deficiency: unpaid invoices.
As a means of bridging the capital gaps that accompany growth invoice finance is a great theoretical answer, thankfully a practical reality too. The loan facility reflects the business being done so it grows or it shrinks in line with invoices that are unpaid: this is particularly useful for businesses with big seasonal variations in their trading patterns.
A bank loan is wholly unsuitable here being too inflexible and requiring assets of a permanent type as security.
Factoring and Invoice Discounting - the differences
Invoice finance facilities are split into two basic disciplines. Factoring: this is where the lender notifies your customer that the invoices are assigned and collects them too. Discounting: here the company’s substance and reporting systems mean that the lender is happy for the borrower to collect the invoices and present regular reconciliations as to the position. The former is often best suited to smaller and newer companies, the latter to the more established.
Money is advanced to a percentage of your outstanding invoices depending upon the quality of the party invoiced and the spread of them too though some firms will look at single invoice finance. With factoring you get paid the balance when the invoice has been collected, less the charges for borrowing the money.
The big advantage of invoice finance is that the business owner is in control though subject to some reasonable protocols on the part of the lender so they can manage their risk properly. Seeking angel or venture capital instead to meet working capital needs involves a surrender of equity or shares, often paying a penal rate of interest on the money invested, having your business run to suit an exit strategy for the investor often to the detriment of its fabric and the fact that much of the capital they invest might be lying idle for much of the time.
A wide variety of invoice finance providers is available. We can use our contacts to compare different providers and come up with the best fit for your business
For more information please contact Iain Sim or Gill Groom.