Latest statistics have shown that there were 880k new start businesses in the UK in 2024. This is a record and follows on from another record year in 2023. An interesting statistic against the challenging business landscape. As businesses grow their funding structure needs to change. In the early days, they tend to be more reliant on personal savings or perhaps monies lent from family. But as the business continue to grow and they move to the next stage of their business lifecycle, they need additional funding to support that growth.
Mainstream channels will direct businesses towards traditional forms of lending such as a loan or bank overdraft. Many business owners are unaware or lack the knowledge of other forms of finance that may be more suitable. One type of finance often overlooked is Invoice Finance.
A well-established form of finance
Invoice finance is a well-established and growing sector in the UK. As of 2023, over 45,000 businesses in the UK use some form of invoice finance, with the market size estimated at £3 billion. It’s particularly popular amongst SMEs seeking working capital and a significant portion of businesses using external finance do so for cash flow-related reasons.
There are different types of Invoice Finance
Invoice Finance is a collective term for a number of financing solutions, but these can typically be grouped within:
- Factoring: The funder will advance an agreed percentage of the value of each invoice as they are raised – normally up to 90% and takes over the entire sales ledger management and credit control process, including chasing and collecting payments directly from customers. This means customers will typically be aware of the factoring arrangement although there are confidential solutions available. There may also be the option for clients to retain responsibility for credit control.
- Invoice Discounting: Like factoring in that the funder advances a percentage of the invoice value, but the business retains control of its sales ledger and is responsible for collecting payments from its customers. This arrangement is usually confidential, meaning customers are unaware of the financing.
- Selective Invoice Finance (Selective Factoring): This allows businesses to finance individual invoices rather than their entire sales ledger, offering greater flexibility for specific cash flow needs.
- There are several compelling reasons why businesses choose Invoice Finance, primarily centred around improving cash flow and providing flexible access to working capital, but there are many more benefits to using this flexible form of finance.
1. Improved Cash Flow:
- Access to immediate funds: One of the most significant advantages is that businesses don’t have to wait 30, 60, or even 90 days for customers to pay their invoices. Invoice finance allows them to unlock a significant percentage (often 80-90%) of the invoice value within 24 hours of issuing it. This immediate injection of cash helps bridge the gap between providing goods/services and receiving payment.
- Pay suppliers and employees on time: With consistent cash flow, businesses can promptly pay their suppliers, potentially securing early payment discounts, and ensure employees are paid without delay, fostering stronger relationships and operational efficiency.
- Meet operational expenses: The funds can be used to cover day-to-day operational costs whilst managing overheads. The improved cashflow can also relieve the strain caused by late paying customers.
2. Flexible and Scalable:
- Funding grows in line with your business: Unlike traditional loans with fixed amounts, invoice finance facilities are dynamic. As a business’s sales and outstanding invoices increase, the available funding also increases, allowing the finance to scale in real-time with business growth.
- No additional debt: Invoice finance is a way to leverage existing assets – your invoices – rather than taking on additional debt, which can be beneficial for a company’s balance sheet and future borrowing capacity.
- Flexible financing options: Businesses can choose between different types of invoice finance (factoring or discounting) based on their specific needs and preferences.
3. Support business growth:
- Seize growth opportunities: With a healthier cashflow, businesses are better positioned to take on new contracts, invest in new equipment or technology, expand operations, and capitalize on growth opportunities without being constrained by a lack of available working capital.
- Can give you the confidence to grow: Invoice Finance (or factoring specifically) can provide sales ledger and credit control services as part of the offering, which involves the funder chasing and collecting payments which can free up a time and resources. Some funders also offer bad debt protection which safeguards against non-payment from customers giving increased confidence to expand.
4. Easy and simpler to put in place
- Less reliance on security: The unpaid invoices serve as the primary security for the facility, generally reducing the need to pledge other valuable assets like property or machinery.
- Faster and easier approval than traditional loans: The approval process for invoice finance often focuses more on the creditworthiness of the business’s customers rather than solely on the business’s own credit history, making it more accessible for businesses with a weaker credit profile but strong debtors.
In conclusion, for UK businesses that sell goods or services on credit terms to other businesses, invoice finance offers a powerful solution to manage cashflow, reduce financial risk, and support growth.
