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One of the most serious practical outcomes of the global financial crisis for business owners is that bank funding for small and medium sized businesses is increasingly hard to come by. This leads to cash flow problems which result in missed opportunities for companies looking to expand and which leave businesses who rely on 60 or 90 day invoicing in precarious situations.
Invoice finance companies provide a solution to this predicament that circumvents the need for bank loans and instead frees up the capital from your as yet unpaid invoices. This flexible form of finance lets you expand your business using only funds that you’ve already billed for but without having to wait for payment to clear. It can also protect you from the crises of liquidity that occur when your creditors call on funds before your debtors have settled up.
This Buyer’s Guide to invoice finance companies will introduce you to the main forms of invoice finance and provide helpful advice on choosing an invoice finance provider.
The Benefits of Invoice Finance
Invoice finance provides a flexible funding line for your company using your outstanding invoices as collateral. By treating your invoices as assets the invoice finance company can release up to 90% of the face value up front with the rest on payment (minus the invoice finance company’s fee).
An invoice finance facility can:
- Unlock capital held in unpaid invoices immediately;
- Free up funds for use in business expansion or paying creditors;
- Provide credit control facilities, letting you deploy staff to other business areas or eradicating credit control expenditures altogether;
- Provide protection from bad debt by credit checking customers and fully insuring you against failed payments.
What’s more, with invoice finance you’re borrowing on a one-to-one basis with the assets you’re handing over to the lender (i.e. your invoices) so that theoretically you can’t get out of your depth by taking on more debt than you can realistically pay back.
Invoice Finance Options
There are several types of invoice finance. While the distinctions between them might seem trivial on paper, in practice they can have large consequences for your cash flow, customer relations and security from default, so consider carefully which is the right option for your business.
The main invoice factoring options are:
- Invoice Factoring
Here the invoice finance company pays you up to 90% of the face value of your invoices immediately with the balance (minus a fee) payable when the invoice is settled. The provider will take on credit control responsibilities – chasing up and collecting payment from your customers – taking away your need to employ a credit control team. While the advantages of such an arrangement are obvious, it’s worth bearing in mind that there will be an impact on your customer relations.
- Invoice Discounting
This is very similar to invoice factoring (i.e. you get up to 90% of the value up front, the balance on payment) but with invoice discounting you retain responsibility for credit control. This keeps the service confidential and lets you command total control of your customer relations.
- Recourse vs. Non-recourse
Within invoice factoring and invoice discounting there are two further options: with and without recourse. Recourse is when your customers default on payment and you become liable for the outstanding balance (i.e. the money you’ve borrowed from the invoice finance company). Most invoice finance companies offer to insure you against this eventuality for an additional fee. This also involves credit checking your customers – an extra step that must occur during the sales process.
- Asset Based Lending
Most invoice finance companies also offer additional lines of funding against other assets like stock, plant, equipment and property. You could also refinance your existing equipment and property in order to free up capital locked therein. Always remember that your assets may be at risk if you are unable to keep up repayments on the loan.
Choosing an Invoice Finance Provider
There are several factors to consider when choosing a company to provide invoice finance. These include:
- Bank or independent? Many business owners feel quite strongly about the role of banks in the recent economic problems and prefer to avoid them. Others feel that by spreading out their obligations between banks and other sources of funding they reduce their risk and others still feel that you get better customer service from an independent company. It’s worth considering though, that independent providers don’t have the same financial backing and history of a bank and so won’t be able to provide the assurance that comes with a well-known brand.
- Amount of capital released. The amount invoice finance companies will release up front ranges from 80-90% of the invoice’s face value so do remember to check.
- Fees. There are often service fees which amount to between 0.5% and 5% of the invoice value as well as interest on the credit line of up to 5% above base rate. We recommend getting specific quotes from several invoice finance providers in order to find the best rates available. There might also be a minimum annual fee or charges for rolling over finance when customers don’t pay within the agreed timeframe (re-factoring charges). Read more about Invoice Factoring Costs and Fees.
- Customer service. Will the invoice finance company provide a dedicated account manager and do you get to talk to them before signing the contract? If the company is taking on your credit checking and credit control functions, who do they have dealing with your customers and what have previous clients said about them? The plethora of internet forums and advice sites let you easily check how such companies are perceived by existing customers through a simple Google search.
Invoice finance is a quick to set up way to release business funding for expansion and avoid temporary liquidity issues. With the current difficulty in obtaining bank loans it’s also often the only option available for some SMEs. Nevertheless we always recommend that you choose your invoice factoring provider carefully and explore as many options as possible before making a decision. With your company’s assets, credit rating and reputation at stake you should always endeavour to opt for the safest pair of hands possible.
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