Understanding Invoice Finance: A Complete Beginner’s Guide

The world of business finance, and what we are exploring today – invoice finance – can be a little bit overwhelming. There’s the financial jargon, different options to choose from and you may be finding it tricky to choose what is best for your business. It is possible you have heard on the grapevine that invoice finance is a fantastic way to improve cash flow, or you have heard about other businesses using it effectively. However, we totally understand that choosing a facility can be a minefield, and what you really want to know is, what is invoice finance and how will it help my business?

Invoice finance is a form of business borrowing, designed to improve cash flow. You can raise up to 90% of your unpaid invoices without having to wait 30, 60 or 90+ days for them to be paid. You raise invoices with your chosen lender and receive up to 90% of the gross invoice value on the same day. This means that you can continue to grow and develop instead of waiting for customers to pay. The remaining 10% (minus a lender’s fee) is paid once your customers have paid their invoices.

 

What does the process look like?

A step-by-step guide to the process of raising invoices from a lender:

Send your invoices

Firstly, you send your invoice to your customer, and another copy to your chosen lender.

Receive up to 90% of the invoice value

Depending on the terms agreed, you will receive up to 90% of the invoice value on the same day as when you issued the invoice.

Your customer pays their invoice

Your customer pays their invoice within the agreed terms.

You receive the remaining 10%

Once your customer has paid their invoice, you will receive the remaining 10% of the invoice value, minus the lender’s fee.

 

Still boggling your mind a little bit? Here is an example of what the invoice financing process might look like for a made-up company.

 

A made-up example: Recruit Me Ltd

Recruit Me Ltd have provided temporary staff for an event and raise an invoice of £10,000 to their customer. They expect the invoice to be paid after 30 days from the end of the month. In the meantime, Recruit Me Ltd receive a phone call requesting more temporary staff for another event the following week – but they don’t have the cash flow to be able to pay the new staff as they have not received payment from the previous job.

Fortunately, Recruit Me Ltd have an Invoice Finance facility. They send a copy of the invoice to their lender and receive up to 90% of the invoice value that same day. They can hire their staff ready for the week ahead and do not need to worry about the flow of cash. After 30 days, the lender receives the invoice payment and sends Recruit Me Ltd the remaining 10%, minus the lender’s fee.

Having the Invoice Finance facility has meant that Recruit Me Ltd have been able to grow their business incredibly fast compared to if they were having to wait to be paid for the staff they had already provided.

 

The different types of Invoice Finance

When looking into the world of invoice finance, you have probably come across words like ‘factoring’ and ‘invoice discounting’ along with a bunch of other definitions that can be difficult to decipher.

There are generally four different types of invoice finance facilities, and the following descriptions can help you decide what would suit you and your business:

Invoice Factoring enables you to release up to 90% (depending on your agreement) of your outstanding invoices across your whole sales ledger. Your chosen lender will handle the credit control and chase your debtors directly.

This may be a more appropriate option if you do not want your customers to be aware that you have an invoice finance facility and would prefer to keep this information confidential. You are still able to release funds across the whole sales ledger, but you will be responsible for your credit control.

A CHOCCS facility could be described as a hybrid between factoring and CID – your customers will be aware you are using invoice finance, but you as the client will handle chasing your debtors.

Instead of releasing funds across your whole sales ledger, selective invoice finance enables you to choose one or multiple invoices to borrow against.

 

Advantages of using Invoice Finance

So, what are the advantages of having an invoice finance facility? Why does your business need it to help you grow to your full potential? Here are the top 5 reasons:

Without having to wait for money to arrive that is tied up in invoices, you can speed up the growth of your business.

The pressure will be off to receive payments quickly from your customers, as having an invoice finance facility means your business won’t be hindered if they don’t pay straight away; this means you are able to give more flexible repayment terms.

Once you have sent an invoice, the funds are usually sent to you within 24 hours.

Although you will have a funding limit in line with your forecasted turnover, you do not need to borrow the full amount – only borrow what you need.

By including bad debt protection in your finance facility, you can make sure you are protected if a debtor is unable to pay.

 

How do I set up a facility?

This is where Contact Business Finance comes in. We can help by putting you in contact with the most suitable lenders in a free-of-charge service. We will meet with you and discuss the needs of your business and use our wealth of experience and knowledge of invoice finance and different lenders to help you find the perfect fit for your business. Here is what that process will look like:

 

To enquire about a facility, call 01902 219260 or email info@contactbusinessfinance.co.uk. 

We will meet with you to get to know you and your business and discuss what we feel would be the most appropriate and effective facility for you.

Then it’s over to us to do our bit! We will contact the lenders we think will work best for your needs and gather the top offers on the market for you.

We will be able to talk you through the lenders we have spoken to, and ensure you understand all of the fees.

Then it’s your turn – it is completely your choice as to which lender to go with. You will be put in touch with the lender you choose and they will be able to guide you further in the process. However, we will still be there for you if you need us – for more invoice financing advice, or whether you want to talk about other kinds of business finance; we’re just a phone call away.