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How to Use Invoice Financing

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.

Are you a business looking for a method to increase cash flow and speed up access to money owed to you? Then invoice financing may be an option for you and your business. Invoice financing is where a business borrows money based on the amount due from the unpaid invoices from their customers. By doing this, cash can be accessed straight away rather than waiting for the invoice to be paid by the client. This quicker access to monies owed may allow you to grow your business quicker and alleviate any cash flow issues.

There are different forms of invoice financing known as invoice factoring whereby a third party company collects your outstanding invoices, or invoicing discounting where you collect the invoices yourself. This article will look at the ways invoice financing in general can be used to support your business.

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.

Factoring

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).

Trading

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

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.

Receivables

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.

What does Invoice Financing Do?

  1. Speeds up access to money

After invoicing a customer, it may still take some time for the money to be received into your business account. By invoice financing, the speed in which the money is accessible is dramatically increased. Invoice financing works by selling the invoice to an invoice financier who then will advance up to 90% of the invoice cost. Rather than waiting 30 – 90 days for the money to be in your business account, the money is accessible within a few days. When you are waiting on multiple invoices to be paid or have lots of outstanding invoices, this can prevent business growth.

  1. Helps grow your business

Invoice financing is flexible compared to traditional forms of borrowing like overdrafts or a traditional business loan. As invoice financing is based on actual customer sales, it will increase as your business grows and ensure a healthy cash flow.

  1. Increases your business opportunities

By invoice financing, you can expand at a faster pace due to the availability of cash rather than waiting for invoices to come in. This means you can employ more staff, take on larger orders or even negotiate with suppliers due to having cash on hand.

  1. Free up time

If you decide to pick invoice factoring, you can free up time by handing over the responsibility of collecting invoices to a third party. This provides you more time to focus on the business and passes the pressure of chasing up creditors to someone else. Small businesses waste a lot of time chasing invoices just to get paid for services – invoice financing takes away the hassle and ensures you get paid in a timely manner.

If you’d like to know about invoice financing and the options that might work best for you and your business, get in touch with the experts at Genie Lending who can advise you further on this exciting and innovative financing option.

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.

Updated: June 2018