Introduce your business to a new kind of short-term borrowing.
If you are tired of waiting weeks or even months for invoices to be cashed and need a more consistent source of working capital, invoice financing might be something to consider.
Invoice financing is a new form of borrowing with reduced risk, relying only on customer payments for success. Unlike other types of business lending, there are no interest rates or secured assets, only a steady stream of revenue that is backed up by invoices from your clients.
How does invoice financing work?
Invoice financing is fairly simple. Once an invoice is generated, you forward it to an external invoice funding business that will generally process it within 24 hours. They will then transfer the invoice amount to you from their own funds, minus a percentage as payment.
How you can compare invoice financing providers
As with other types of business lending and credit platforms, there are several factors you should consider and compare in order to select the best invoice financing provider for you. Here are a few things to keep in mind:
- Advance fees. These are typically charged at around 3% of each invoice. However, funding providers may increase this if they view your company as less financially secure, for example, if you have a poor credit rating.
- Additional fees. Some invoice financing providers will charge you exchange and transaction fees along with discount fees from early payment offers made to your clients.
- Loan amount. Many invoice financing providers are set up to offer a personal, efficient service to small businesses. However, bigger companies may be better suited to a bank or service that can handle a larger quantity of invoices.
- Repayment options. Make sure you know each provider’s policy on late repayments, just in case a client lets you down.
Contract or pay as you go?
Some invoice financing companies require you to sign a contract, while others encourage their services to be used on an individual basis. Invoice financing is split into three types, designed to suit the needs of every type of business.
- All-of-turnover invoice factoring. This is designed for businesses that want a long-term solution for invoice factoring, with providers usually offering their services on a 12-month contract. Although not very flexible, all-of-turnover invoice factoring can offer the highest possible turnover rates with the lowest fees.
- Partial ledger invoice factoring. Partial ledger invoice factoring will also require you to sign a contract, but it also offers more flexibility. You can choose to capitalise on your invoices at particular times during the year and even ask your provider to focus on processing invoices from select clients.
- Spot factoring. This could be the right kind of factoring if you need to process a single batch of invoices. While not being tied to a contract can be a good thing, you can be charged multiple fees and a high advance rate by a provider keen to capitalise on your limited business.
The benefits and drawbacks to consider
In spite of its differences with credit cards, loans and overdrafts, invoice financing is still a form of borrowing and as such it comes with both benefits and drawbacks.
- No repayments. Without the stress of ongoing repayments, you can focus your efforts elsewhere.
- No more secured assets. Forget the constant anxiety that comes with securing property and personal possessions.
- No interest rates or penalty fees. Repayments are only reliant on the money you’re owed, which cancels the need for interest and fees.
- Plan your finances effectively. Because you know when the money will be in your account you can make decisions on future outgoings with more confidence.
- A flexible service. Unlike a long-term loan, you can decide exactly how long you require the services of an invoice financing provider.
- Less control over total funds. Unlike a loan, invoice funding doesn’t give you the same freedom to choose the exact amount you take on.
- If clients don’t pay, it’s your problem. Invoice financing providers will cover the cost of missed payments by increasing advance fees, so you could see your credit score affected.
What are the costs of invoice financing?
Most invoice funding companies will pay you between 80-95% of the total value of your invoices on the same day they are issued. An advance fee will also be charged, usually between 2-5% of the invoice amount. The exact costs involved will depend on your business, though many invoice funding providers also charge set transaction, exchange and discount fees.
Common questions about invoice financing
Can any business use invoice financing?
From multi-billion dollar companies to sole traders and freelancers, there are invoice financing firms built to help a range of clients.
What is the application and approval process?
For smaller businesses, there are online services offering fast approval by linking your accounting software to their service. Larger businesses will generally need to go through a lengthier application and approval process.
Will my customers know I’m using an invoice financing company?
This will depend on your provider. Some offer a completely confidential service while others will want to verify your clients. Having your provider in contact with your clients can be useful, as they can help you to chase up those that have unpaid invoices. Just make sure they don’t communicate with clients in a way that could undermine your relationship with them.
Whose job is it to collect the invoice from the customer?
While the invoice financing company might approach your customers, it remains primarily your responsibility to have the invoice paid. Once it is, you will usually be transferred your residual share within 24 hours.
What if a client transfers an invoice to me instead of the financing company?
Different companies will have their own policies but you will likely need to notify them as soon as possible and transfer the funds into the correct account to avoid any negative marks on your credit file.
What if a customer doesn't pay their invoice?
This will depend on who your invoice financing provider. Some providers will cover the cost but increase future fee's while others offer packages whereby you choose whether to bear responsibility or not.