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What is Invoice Finance?
Invoice finance provides your business with a cash flow injection by releasing capital tied up in unpaid invoices. Invoices can take up to 90 days to complete, leaving you waiting for the money you’re owed until the payment terms elapse. Using the help of invoice finance products, you can continue to run your business as usual without having any negative financial impacts.
The invoice finance companies we have access to can pay up to 90% of the value in your invoices the minute they are raised. Then, once the payment has been settled in 30, 60, 90 or even 120 days, you will receive the balance minus a small fee.
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What are the different types of Invoice Finance?
As with most types of finance, there are different styles of agreements to suit different business needs. Identifying how much control and involvement you want is key to finding the right invoice financing style for you. Read on to find out what you can expect from each type.
Selective Invoice Finance
This is when you release capital on one single invoice rather than your whole ledger. Selective Invoice Finance, also known as single invoice finance, is particularly useful for large invoices that your company is waiting on and can improve your cashflow quickly, without having to overspend on fees. This is a more flexible approach to invoice finance than regular invoice factoring but can be more difficult to secure.
How does Selective Invoice Finance work?
- Your business will select an individual invoice which needs to be processed quickly. You’ll give the details to the financing company and agree on rates and fees.
- The invoice is verified by the financing company and they’ll advance a percentage of the invoice to you upfront.
- When your client pays the remaining balance of the invoice, the selective invoice financing company will collect the debt and provide you with the rest of the payment, minus their fees.
Invoice Factoring is very similar to Selective Invoice Financing but is a full-facility product which deals with all your invoices. Chasing late payments can really set your business back but, with this kind of service, clients are encouraged to pay on time with the backing of an external source.
This facility is generally used by smaller companies with average turnovers of around £200k. The facility is disclosed therefore making your customer aware that it is in place. This type of ‘credit control’ and credit checking service safeguards you against falling into debt because of clients not paying or paying late – allowing you to keep your business running smoothly.
How does Invoice Factoring work?
- You will provide the factoring company with details of all your invoices and agree on their rates and fees.
- The factor will advance you a percentage of the invoice and proceed with collecting the rest of the debt from your client.
- Once the payment has been collected, the factoring company will provide you with the remaining balance, minus their fees.
More commonly used by businesses with turnovers of over £500k, this type of invoice finance is similar to Invoice Factoring but is more hands-on. In Invoice Discounting, you will be in charge of providing your own credit control. This is the main difference between Invoice Factoring and Discounting, and allows you to remain in control of any communication with your clients.
How does Invoice Discounting work?
- You will send the discounting company your invoices as orders are fulfilled. The discounting company will then deposit a percentage of the whole invoice to your business account.
- Once the agreed percentage has been paid to you, you can proceed to collect the remaining balance from your client.
- The discounting company will claim their fees from this remaining balance or you will send them, depending on your agreement.
This facility works very similar to invoice discounting; however, the only difference is that you keep control over your sales ledger operations, keeping this facility confidential.
What does Invoice Finance cost?
Dependent on what lender your application is with, you can expect fees to be anywhere between 1% – 4% of the invoice value. There are also products where an annual fee is taken, as well as a subscription fee.
Are there any businesses that can’t use Invoice Finance?
There are some sectors we can’t work with such as retail and hospitality as they do not raise very many invoices to business customers. Our ideal customer raises more than five invoices a month to other business customers.
If you have poor credit, there are no guarantees that an Invoice Finance option would be available to you. However, there are certain lenders that can still work with adverse credit. This solely depends on what the adverse credit is and how much it was for.
For any further information regarding our invoice finance services, call us on 01371 870815 or email us at firstname.lastname@example.org.
Other types of business loans
Example of Invoice Finance
Kate’s business has just set up an invoice finance facility through Aurora Capital to assist in the day to day working capital of the company. Kate issues an invoice for £10,000 for work that has already been completed on 30-day credit. Kate agrees with the invoice finance company that she will be advanced 90% of the invoice value up front and the rest when the customer settles in full. That means that Kate will receive £9,000 as soon as the invoice is raised, providing her with much needed working capital to run her business.
Kate’s customer then settles her invoice 30 days later (credit terms can be longer), paying the £10,000 into an escrow account held by the lender.Dependent on which product you choose,this can be kept confidential.
The invoice finance company then pays Kate the remaining £1,000 minus their fees.
In summary, Kate has been able to unlock cash tied up in her invoices for a small fee. This will not only assist in the day to day running of the business, but will also free up capital for potential growth plans.