Should I use Invoice Finance?
Invocie Finance
Invoice factoring is a way that you can get extra finance in your company. As a company you will have many ways to make sure that you can meet your working capital requirements. This is even more so now with finance marketplace’s like Capitalise where you can connect your accounts and search for finance that is suitable for your business.
What finance you choose to use for your company will depend exactly on what you need. Do you want finance to buy a new computer, perhaps asset finance may be more suitable. If you are wanting finance to help you manage your working capital requirement and you have overdue invoices in your sales ledger you may want to use invoice financing.
You may have exhausted all ways to get your customers to pay early but they just refuse to do so. An option in this case may be to use invoice finance.
There are a lot of suppliers of invoice finance on the market now and whilst in the past it might have been reserved for companies of a certain size and with a trading history this has now changed and this is now open to a lot more companies to make use of this kind of finance.
What is invoice finance?
Invoicing finance usually means that you are either selling your invoices to a third party to collect or you are using the customer invoices in your accounts payable to raise finance whilst you go through your debt collection process. The finance company will look at the customers that you are dealing with and credit score these along with your company and then they will advance you funds based on these credit scores.
This can be helpful as a startup or a small business because your customer is involved in the process just as much as you. It is looked at as what is the probability that they will pay the outstanding invoice that you are owed?
When you raise your invoice you submit the invoices to the invoice factoring company and the advance is paid into your bank account. When you are paid the invoice the finance company is repaid for the advance that you have been given.
There is of course a cost for providing this kind of service. The amount that you are advanced will normally be subject to interest and also an admin charge every time you use the service to raise finance. Some providers may want you to submit all of your invoices to them using this service or you may be able to select the ones that you want to raise finance on.
What is the cost?
The costs of invoicing financing may vary per application but normally there will be an arrangement cost to set the facility up for your company. There will then be a service cost, this will essentially be an admin fee to raise the finance on the invoices that you are passing to the financing company.
On top of that there is the cost of the finance, this amount is normally in relation to the current Bank of England exchange rate. This at the moment may be as low as 2-3% depending on the company that you use. When you use the invoice financing there will be a maximum term that you will be advanced funds for during that time it is expected that the invoices will be paid.
Depending on the terms of the agreement it will either be your company or the finance company that will be collecting payment from your customers. If the finance company is going to be collecting money on your behalf you will need to be careful with the one that you choose to use.
Obviously the finance companies first priority is to collect the money that they have loaned out. The relationship with your customer may not be the first priority and if they chase too aggressively this will obviously damage your relationship with them.
How can it help me?
Invoice finance can provide you with a very accessible way to get working capital into your business to help you cashflow and keep your business running. The finance raised this way may be cheaper than using a business loan or business overdraft and from the lenders point of view the invoices that you are providing as security for the loan gives them assurance that it will be paid.
If there are any invoices that become bad debts during this time you will normally be expected to repay the money to the finance company.
It has been for our clients an easy way to access finance even if you are a startup with no trading accounts or history. Using this as a source of finance for our clients in the past 12 months we have managed to secure an offer of finance up to £175,000 for a new company with no trading history and only a few months worth of bank transactions with a finance charge of 3%.
In short an invoice finance agreement can provide a low cost finance option for a new company.
How can you help me set it up?
Yes we can help you calculate your working capital requirements and discuss with you what your options would be to find the right solution for you. Obviously before we jump straight into getting finance for your business we need to look at its finances. The balance sheet, assets and liabilities and how you collect your debts.
Taking finance is a big step and it will need to be repaid at some point in the future and we need to make sure that if you do take finance for your business you can pay it back.
But we will look at your options and discuss them with you until we are happy with the finance solution that we find.
Once we have decided on the type of finance you want we can help you look for the right provider and help you by giving them all the information that they require to set up your finance facility.
