Invoice finance is a form of credit that releases cash from outstanding invoices as soon as they’re raised. The amount released could be up to 90% of the value of the invoice, with the cash typically made available within 24 hours of issue. The remaining 10% balance is paid once the customer settles their invoice.
There are two types of invoice finance: factoring and invoice discounting. Factoring is a form of invoice finance where cash is released against unpaid invoices with the business passing the management of their sales ledger over to the lender. Invoice discounting on the other hand is a confidential funding solution where the business retains responsibility for managing their credit control and payment collection.
Invoice finance can provide an effective financing solution for a number of industries:
Cashflow issues are very common within the recruitment industry. Maintaining a healthy bank balance can be particularly difficult for recruitment agencies, as they often need to pay contractors and temps weeks before they get paid by their customers.
This causes huge gaps in credit as payments could be outstanding to clients for up to 90 days and this lack of cash can restrict business growth. Start-up recruitment firms face an even greater challenge as they are often dependent on one or two customers, which diminishes the equity available for funding.
For companies facing these issues, invoice finance can be a great solution, particularly as many providers offer financing packages that include back-office administration to help recruitment firms with PAYE, invoicing and taking orders, in addition to funding invoices for permanent placements. This bridges the cashflow gap and enables businesses to operate whilst waiting on client payments.
Whenever the economy is in financial difficulty, the construction sector is often the first major industry to be affected. In a bid to cut down on public and private expenditure, construction projects will be the first to be culled. Customers could take up to 90 days to pay and any delays or cancellations create a much bigger cashflow gap.
Invoice finance providers tend to avoid the construction industry as a whole. Rather than the traditional ‘invoices’ that invoice finance firms are familiar with, the construction sector operates with ‘applications for payment’. However, construction contractors still have to pay wages and overhead costs. Because there’s a high degree of risk associated with this industry, the prepayment level tends to be lower, say 60%, when compared to other industries.
Hence, invoice finance lenders are often wary of helping construction firms as assets can’t always be secured on half-completed projects. However, there are several lenders that tailor their funding packages to suit this industry as they understand the differing payment and contract terms.
The economic climate, rising material and distribution costs have hit manufacturers hard. Plus, as manufacturing businesses typically need to purchase raw materials in order to produce goods long before payment is received for the final product, cashflow can often be an issue.
Invoice finance provides an injection of funds to bridge the cashflow gap between the payment of manufacturing overheads and the receipt of income. It can enable manufacturers to boost working capital in order to manage peaks in demand and service new contracts.
Fluctuating stock prices, high overhead costs and the problematic economic climate can all create unique challenges for wholesalers and distributors. With invoice finance, wholesalers can gain access to cash directly linked to turnover as well as take advantage of early supplier discounts.
The funds released can create additional working capital needed to react promptly to changing demand and stock investment. The credit control function can help wholesalers overcome late payment issues, avoid the impact of bad debts and ensure that good customer relationships are maintained. Also, asset finance can enable distributors acquire equipment and stock at very convenient terms, before customers make payment.
Sema Fongod is the copywriter for Invoicediscounting.uk.com, the invoice finance brokers, working with over 20 of the UK’s leading lenders, from boutique specialists to high street banks, to secure the most suitable cashflow solution for businesses.