Invoice Finance That Works For you

What is invoice financing and how does it work?

Invoice financing is also known as accounts receivable financing or debt financing. It’s a form of funding that allows businesses to access funds tied up in outstanding invoices. 

It’s a great way to improve cash flow by obtaining immediate payment for your own invoices, particularly for businesses in the B2B environment that have quite drawn out payment terms. 

I see a lot of people in the tier 1 sector of FMCGs, supplying supermarkets with temporary workers. They make use of invoice financing simply because the payment terms are lengthy – and that’s what they have to adhere to to win the business. But it unfortunately makes cash flow an issue, so invoice financing really helps with that.

What are the advantages of invoice financing?

The main advantage is that it improves cash flow. You’re able to unlock money from your finances and plug your monthly cash flow gaps pretty quickly. You also have flexibility in what you can fund or what cash you can raise. 

For example, you don’t have to cash in all your invoices, you can pick and choose the ones to raise financing against. You can even then choose a certain loan to invoice value. Some lenders tend to go around about 90% to 95% of the invoice amount, but you don’t have to raise the full amount. 

Of course, it reduces your credit risk, with the responsibility of collecting payments from customers technically transferred to the lender. That reduces bad debts and allows the business to focus on day-to-day running.

What are the disadvantages of invoice finance?

Cost. Nothing comes free, so of course when you are cashing in your invoices, there are costs.  It’s debt lending and interest is applied to your invoices, so the credit worthiness of your customers has to be in fairly good condition. That’s not only to cash in your invoices but to reduce the fees and the interests charged on them. 

Another thing to consider is the impact on customer relationships – when you’re using a factoring lender you are selling your invoices to essentially a third party, who can step in if the invoices are not paid. They can make direct contact with your client. 

With discounting it’s a little bit more discreet – that third party won’t step in and contact your customer, but you will have to chase for timely payments. 

How do you qualify for invoice financing?

The bulk of invoice financing is usually applicable to business to business clients. You’ve got to have a debtor book and sales in the pipeline. You’ve also got to be selling to another creditworthy customer. 

Both yourself and your customers go under the underwriting microscope, to assess that both are viable businesses with no concerns of bankruptcy, or you don’t have any aged debts that are being recalled. If both are seen to be creditworthy businesses, then you should be eligible. 

There are some commodities that a lot of lenders don’t like – for example, perishable goods. If you’re selling fruit and vegetables a lot of lenders tend to shy away from that, because if your customer doesn’t pay the bill, what are they going to be able to take? They can’t take vegetables that are disintegrating whilst waiting for your invoice to be paid. 

Selling non-perishable products or providing a service is fine as long as it’s contractual. Supplying temporary workers to a warehouse is quite common, and we have a few funding lines to support that activity. There isn’t much that they wouldn’t fund as long as you are ticking those boxes.

Do banks offer invoice financing?

Yes, but only certain banks are in the invoice financing industry. It’s fairly limited. There are also very specific lenders who are not banks. With these providers their whole operating  model is funding invoices. So we’ve got banks that we work with but we’ve also got specialist lenders.

How can a financial advisor help with invoice financing?

First of all, we’ll let you know if you’re eligible or whether invoice financing is available. We will look at your cash flow, your accounts and your debtor book. We can identify if there is a cash flow issue – whether you’re aware of it or not – and provide you with invoice financing as one of many solutions. 

Educating a managing director or financial director on invoice financing is key – you need to know what it’s for, how you can use it and how it can help. We consult with and advise our clients on how to implement it and get a facility in place. 

We also know which lenders to go to and will help you keep on top of the facility itself. You are usually fixed into a contract, but when it ends we’ll look at whether staying with the same lender is the right thing for you. We can even help negotiate your rate and find you a better one as needed.  There are many things that we can do at Grand Union