Waiting for an invoice to be paid can be a real inconvenience - it places businesses under strain, affects their cash-flow and ultimately has an impact on business growth.
It probably won’t come as a surprise to any small business owner to read that over one million UK businesses are affected by the late payment of invoices. However, invoice finance can help – read on to find out more with uSwitch for Business.
What is invoice finance?
In simple terms, invoice finance companies lend you up to 90% of the value of your unpaid invoices, which lets you bridge the gap between raising an invoice and receiving payment. You can usually get the money within 24 hours of raising the invoice, rather than the 30 to 60 day period you could otherwise end up waiting, which can improve your cash flow and reduce your administration costs.
Invoice finance is becoming increasingly common among businesses in the UK, with over 40,000 companies using the service. The finance is provided by big banks, as well as independent and small lenders, including Lloyds TSB Commercial Finance, Royal Bank of Scotland, Bibby Financial Services and Hitachi Capital.
Debt factoring takes invoice finance a step further – in effect you sell your invoice on, and in return the lender processes the invoice for you and allows you to draw loans against the money owed to your business.
How does invoice finance work?
Step 1: You raise an invoice, just as you usually would, and send a copy to both your customer and the invoice finance company.
Step 2: The lender will make the money available to you – up to an agreed percentage of the invoice value (usually up to about 90%).
Step 3: If you opt for a debt factoring service, the invoice finance company will collect payment for you; if you just use invoice finance you do this yourself.
Step 4: The invoice finance company will return any money they have collected during the month to you - minus their fees - if you’re use factoring. If you collect money yourself, the lender will invoice you for any fees at the end of each month or quarter.
How much does invoice finance cost?
Like other types of borrowing, invoice finance doesn’t come for free – there are both service and finance fees to pay. Some businesses find that the fees are offset, because of the resource they would usually have dedicated to chasing and collecting payments.
Fees can be very different between different invoice finance providers, and will also depend on the turnover of your business, the industry you’re in and who you invoice. You can compare quotes for invoice finance online with Touch Financial.
It’s important to remember that invoice factoring will have an impact on the profit margin of each invoice, because of the cost of the fees.
Who can use invoice finance?
To make use of invoice finance you need to meet the following criteria:
- Your projected annual turnover for the next twelve months is above £50,000.
- You provide goods and services to other businesses.
- Issue credit terms of between 30 – 90 days.
Things to watch out for when comparing invoice finance
- There are plenty of different lenders offering invoice finance, and they tend to differ in the kind of business and level of turnover they cater for, so it’s important to check that you’re getting the best possible deal for your business.
- Some lenders will charge a minimum service fee if the turnover of your business falls below a pre-agreed amount. You may be able to avoid this by choosing a lender who’s prepared to give you some leeway.
- Some lenders charge termination fees if you want to cancel your contract, for example if you wanted to move to another lender or you find you don’t need the service anymore. Make sure you’re aware of termination fees before you sign up.
- If you opt for debt factoring, make sure you choose a reputable company. As they will be dealing with your customers on your behalf, it’s vital for the reputation of your business that they live up to your standards.