What are the benefits of Invoice Finance?

The benefits of Invoice Finance is instrumental in maintaining a healthy cash flow.  This is important for every business, but it can be particularly challenging for businesses that provide goods or services before receiving payment.  A business may be profitable, have a strong order book and be winning new customers, yet still find itself short of working capital whilst it waits for invoices to be paid.

This is where invoice finance can help.  Invoice finance allows businesses to access the money tied up in unpaid customer invoices rather than waiting for the normal payment date. For businesses operating on 30, 60 or even 90-day payment terms, this can provide a valuable source of working capital.

But what exactly is invoice finance, how does it work, and which industries are particularly well suited to it?

What is invoice finance?

Invoice finance is a form of business funding based on the value of a company’s outstanding invoices.  When a business supplies goods or services to another business on credit, it will normally issue an invoice with an agreed payment date. Until that customer pays, the money remains tied up in the sales ledger.

Invoice finance allows the business to access a percentage of the value of eligible invoices earlier – normally around 80-90% – shortly after it has been raised. Once the customer pays the invoice, the remaining balance becomes available, minus the invoice finance provider’s fees.

Rather than relying solely on traditional borrowing, the business is effectively using its outstanding invoices to help generate working capital.

The benefits of Invoice finance

1. Invoice Finance can support growing businesses

Rapid growth can consume cash.  A company wins a major new customer and sales increase substantially. On paper, this looks excellent. But the business may have to employ more people, purchase additional stock or increase production immediately.  If the new customer pays 60 days after invoicing, the business must finance those additional costs in the meantime.  This creates what is sometimes referred to as a working-capital gap.

2. Improved cash flow

Invoice Finance allows Businesses to access a proportion of outstanding invoice values earlier instead of waiting for customers to pay which at times can be 30, 60 or 90 days.  Businesses using an Invoice Finance solution can access up to 90% of the value of each invoice as they are raised. That is available working capital which can be put to work instantly.

3. Funding that can grow with sales

The amount of funding available to your business grows as your business grows.  The more invoices you raise, the more funds can be released ensuring a continuous flow of cashflow that could potentially support many areas of a business such as meeting payroll, purchasing stock, paying suppliers early to benefit from early payment discounts, investing in new employees, contracts, marketing or expansion.

4. Faster access to working capital

We are all familiar with the hoops that need to be jumped through to secure finance from the traditional channels.  With Invoice Finance, once a facility has been put in place – which can at times be completed in days – the business will benefit from an initial payment of up to 90% of all outstanding invoices.  Then as each invoice is raised funds can be released to provide an ongoing and continuous supply of working capital.

5. Credit-control support

With an Invoice Finance solution, you may also benefit from their sales ledger management solution where the invoice financier manages elements of the sales ledger and collections process.  With the funder handling the collections process, it can speed up customer payment.  It can also save time so that the business can focus on more productive tasks.

6. Use existing business assets

When accessing an Invoice Finance solution, funding is primarily based on the debtor invoices rather than relying entirely on traditional forms of security.  This can be a real advantage for early-stage businesses or service-based businesses who may not have many business assets that they own and are then obliged to commit other forms of security.

7. No equity dilution

Unlike bringing in an investor, invoice finance doesn’t require you to give away ownership of the business.  You are using your own business assets to fund your business.

Ultimately, invoice finance is designed to reduce the amount of time a business has to wait to access money it has already invoiced.

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