Any business owner will be familiar with the situation – the end of the month is approaching, employee salaries and property fees require payment, but you haven’t yet received the funds from a number of outstanding invoices. While a 30-60 day turnaround on invoice is supposed to be standard, statistics show that the average invoice under £1 million takes 71 days to process.
71 days is a long time to wait for money that you need now. That’s where invoice financing can come in handy – allowing you access to upfront cash on money that is still tied up in the bank accounts of various customers and clientele. Invoice financing is a catch-all term which encompasses several different kinds of alternative credit; here’s a rundown on the four major ways you can use it to your advantage.
Perhaps the most common type of invoice financing, this involves a financier or lender effectively “purchasing” the debt from your invoices. They will then forward a percentage of that debt (normally in the region of 85%) to you immediately, before taking control of collecting the debt from your customer. Upon collection, the remainder will be released to you, minus fees and interest (the specifics of which will fluctuate depending on the sums, timescale and risk involved).
Invoice trading is very similar to factoring in that it involves one party purchasing the debt in an invoice from another, but differs in that it allows a company to bypass normal forms of invoice financing (such as regulated financiers) in favour of private individuals or consortiums. It essentially takes the principles of peer-to-peer lending and applies them to invoices, and also allows the company to pick and choose which invoices they trade (as opposed to factoring, in which the entirety of the company’s accounts are often take over by the lender).
Discounting is different from the previous two forms of invoice financing in that the company retains responsibility for collecting all debts from their customers. Instead of purchasing the invoices themselves, the lender simply offers the company a loan, using the invoice as collateral. The service, of course, involves a fee (normally decided as a percentage of the invoice amount) and potentially interest, in which regard it is similar to a traditional bank overdraft or loan – only with the use of invoices as collateral.
The final method of invoice financing is known as a receivables-based line of credit, and involves creating an aggregate of the outstanding balance of invoices, accounts receivables and business assets to allow the company access to a fresh line of credit. With this approach, you are effectively using the net value of your business as collateral to obtain higher amounts of cash, thus enabling you to expand operations or stay competitive in an industry which requires a large amount of capital at once.
Use the right kind of financing for you
Each of these forms of invoice financing can be a great way to access cash at short notice, outsource your invoice collection efforts and bypass the normal difficulties faced when obtaining credit from a bank. However, they can also have their own drawbacks and it’s important you weigh up carefully the pros and cons of each approach before settling on your chosen course of action.
At Genie Lending, we have extensive experience and a network of specialist trade finance providers within the UK with which we can help to make invoice financing work for you. For more information, get in touch with us today.