Invoice Finance That Works For you

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Invoice Finance for Small Businesses

Invoice Finance for Small Businesses (Part 1)

Kal from Grand Union Financial explains how invoice finance works for small businesses. Part one of two episodes, recorded in May 2024.

What is invoice finance and how does it work?

Invoice finance is a type of debt lending within a B2B environment. To give you an idea, perhaps a farmer wants to sell produce to a supermarket. Cash flow is usually an issue with businesses today – and the payment terms from the supermarket may be up to 90 or even 180 days. But the farmer’s got costs, debts to settle and suppliers to pay.

Invoice financing originated back in the early 1990s – it’s not a new product. The farmer can take their invoice for the supermarket to a bank, and the bank will assess the viability of that invoice being paid and the risk that it won’t be paid.

Should they accept the risk, they will release up to 90% or 95% of the invoice value for a short period of time. They will be reimbursed via the payment from your customer.

What are the different types of invoice finance available for small businesses?

There’s factoring, discounting and spot invoice financing.

Invoice discounting is where you, as the borrower of the funds, chase your customer for payment to reimburse the lender and pay the debt off.

Invoice factoring is where the lender chases your customer on your behalf.

Spot financing is relatively new. There are now some invoice financing lenders where you don’t need to sign a 12 month contract – which is common with factoring and discounting services. Instead, you can sign on and choose to raise an invoice as and when you need to on an ad hoc basis.

For example, if you’re in wedding catering and you need to pay your part-time staff quickly, that’s when spot finance can come into its own.


How do I apply for invoice finance? Does that differ depending on the type?

Different lenders do specialise in different sectors. It might be recruitment, manufacturing or consultancy, for example. Some lenders will look at tangible goods and services, while others look at intangible ones.

When you are applying as a business for invoice financing, we have to understand what your business is and what the paper trail looks like. Are you in a B2B environment? What are the payment terms and contractual terms of the goods and services you provide to other companies? We then place that with a lender that’s accustomed to that type of risk.

If your business is brand new, you may think that you probably won’t be able to get invoice financing because you don’t have a set of accounts. But actually, that’s not true. Invoice financing does exist in certain sectors to help startup businesses. One that’s quite common is temporary recruitment.

If your business has been running for two or three years, it will largely come down to the cost of invoice financing. When you submit an invoice for financing, there’s a cost associated with that. As you grow, you’re looking for the best and most competitive cost possible.

You would need to provide a description of your business, the paper trail, a year’s accounts if you’ve got it – and if you don’t, company projections. Then you will need a list of your aged receivables and aged debtors. That’s usually enough to go and start sourcing an invoice financing facility.

What are the criteria for a small business to be eligible for invoice finance?

First, we need to ensure you are applying for invoice financing to assist with a B2B transaction. That’s really important.

A lot of people believe that invoice financing could be for B2C events. If you’re a caterer making and selling cakes to the consumer, I’m afraid invoice financing doesn’t accommodate that.

If it’s a business to business company, we need to demonstrate the payment terms – so when the lender or yourself will be remunerated for the outstanding debt. Also, the goods and services you’re providing need to be acceptable to the lender.

It could be consultancy, temporary recruitment or you might make widgets on a manufacturing line. Basically we ensure you are set up in the right way. Some things, like nuclear waste, are not acceptable. But there is a huge range of tangible and intangible services that are acceptable to lenders, so it’s not too difficult.

What are the advantages of using invoice finance for small businesses? What are the potential drawbacks or risks?

The main advantage for invoice financing is cash flow. Cash is king when it comes to businesses and a cash rich business can pay staff and cover unforeseen costs. You never know what might hit you. That’s why invoice finance is so helpful.

You would want an invoice financing facility if your payment terms are quite drawn out. But you need to accept those payment terms to get that order in a competitive market.

It’s also become a lot easier to get an invoice financing facility. Back in the early 1990s, there was quite a long and arduous onboarding process. Now it’s quite easy to set up a facility – you can be up and running within 24 or 48 hours.

In terms of the drawbacks, depending on the facility you choose, the majority of factoring and discount invoice financing lenders will sign you up to a 12 month contract. Within that, you only place invoices with them.

There are setup costs and fees and when you submit an invoice for financing, it’s debt. You will get charged for the outstanding balance for as long as it’s not repaid. You can shop around. The last three months of your contract is probably the best time to start looking.

With spot invoice finance lenders, you don’t have that time commitment, which is a bit of an advantage, but you still have some sort of contractual agreement. With discounting and factoring the cost is more competitive than with spot invoice finance lenders, but you are locked in for 12 months.

Are there any specific industries or types of businesses that are more suitable for invoice finance?

Yes. When I look at the complete lending panel out there, they do have commonalities in the type of industries they support. Manufacturing and FMCG are definitely bigger hitters with invoice financing.

If you provide temporary recruitment you also have your pick of the bunch, and consultancy is another big sector as long as the contracts are airtight and there are clear, defined milestones.

Can invoice finance agreements be customised to fit the needs of a small business?

If you are starting up or you have limited turnover, the chances are relatively slim. But invoice financing is quite flexible as long as the lenders accept your trading type.

They are really looking at the risk of getting that invoice paid back. They will look at your clients to get an understanding of the credit risk. There are some big corporations out there where a lender may not be able to get all those details. But it’s not usual for an invoice financing lender to offer custom terms.

When you get to a certain turnover and you’ve been with the lender for quite some time, they may make the terms more favourable. But usually for small businesses the flexibility is all there anyway. I’ve never really been asked to change the terms from the lender.

How does invoice finance impact cash flow management for small businesses?

You’ve got suppliers to pay and overheads that are both variable and fixed. Payment terms often have different timeframes. You are held to your commercial payment terms or have to wait until the job is complete and signed off by the customer.

Invoice financing really benefits small businesses because it lets you sign up to those longer term payment contracts with bigger customers. It allows you the ability to expand without really having to worry about cash flow. What goes in goes out, but what gets paid in doesn’t necessarily correspond to the costs going out – so it really does help a small scale business.

If you’re a manufacturer wanting to take on more orders, it will help you scale and buy stock and support staff costs. If you are a consultancy firm and you want to take on a really big project that will require pulling in other consultants at the same time, that will be possible.

You would make sure there are clear milestones as to when you will get paid. You can use that contract with an invoice financing lender to fund the work and recruit the manpower you need.

It’s really there to help you flex your muscles financially and accommodate those big orders. It might be one order here, one order there, allowing you to grow organically without exposing yourself.

What fees or charges are associated with invoice finance?

Every invoice finance lender has their own fee structure, but you’ll certainly have a setup fee – a cost to set up the actual facility itself.

You will have a fee for every invoice you choose to leverage and there’s an interest rate for the term until you pay it back. Some lenders will do an exit fee, as well, should you want to leave the facility early.

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Invoice Finance for Small Businesses

Invoice Finance for Small Businesses (Part 2)

Kal Woodley is back to continue the conversation on invoice finance for small businesses. Episode two of two.

Are there any penalties for early repayments of an invoice finance facility?

Yes. If you are in a 12 month contract, which is quite common for a discount invoice or factoring lender, there are typically early repayment or exit fee charges.

What happens if an invoice goes unpaid by a customer?

It does happen. The type of facility you have, whether it be factoring or discounting finance, usually dictates the next steps if an invoice goes unpaid beyond the agreed commercial payment terms.

The lender will of course communicate with the borrower. They’ll highlight that it is going over the deadline and ask if it’s in hand or if you’d like some assistance. They will want to see some responsibility from yourself as the borrower – ideally you will have started tracking it down and come to an agreement with the customer.

The interest is an important consideration. Let’s say your invoice was £100 and you borrowed £90 against that invoice for the agreed term. If your customer goes over that term and that invoice is not paid, your interest is still ticking over. That £90 you’ve borrowed against the £100 you’re expecting back starts to erode. You will owe not just £90 plus the interest – you could owe £95 plus the interest.

If it goes on for a longer time, you could end up owing more money than the invoice is worth. That does happen. You will have to work with the customer and the lender. The assurance of getting that money back still falls upon the borrower.

Can invoice finance be used alongside other forms of business financing?

Yes, by all means. We do multi-facilities. We can go into a manufacturing facility where asset finance is required, with an invoice financing facility tagged on to it as well.

If you want to buy new machinery to fulfil an order, but you also need to buy the ingredients and you’ve already got the order in from the customer, we can tie that all together.

Does invoice finance require a small business to provide collateral?

No. Some lenders will just ask for a PG – a personal guarantee. That is quite common depending on the size and nature of the business. People need to be wary of that because they think it’s unsecured lending with no risk to them. But all debt is a risk to the borrower.

To mitigate some of that risk, lenders might require a director of the business to enter into a personal guarantee agreement. People don’t realise that until it flags up – they can be surprised, but it’s fairly common.

How does invoice finance affect a small business’ credit rating?

For a limited company or sole trader it doesn’t affect your rating per se, but you do have it marked on your credit file as a floating charge. That basically tells other creditors that you have an open facility.

It doesn’t hinder or stop you from borrowing more or using a different financing facility such as asset finance or a commercial mortgage. The only point where it will start to have an effect is if you go into default – and that can be caused by your customers not paying your invoices.

Do small businesses have the option to choose which invoices to finance?

Yes, they do with a factoring or discount facility. If you’ve got high volumes of orders, a variety of core customers and you want to keep yourself cash rich, 9 times out 10 you would usually send all the invoices. But you don’t have to. If a small invoice is not going to break the bank and you’re happy for it to come in as normal, you can choose to withhold it.

For spot invoice finance lenders, you have the option of picking and choosing when you want to submit an invoice and what for. The customer still needs to be underwritten, and a spot invoice financing facility is a lot more expensive compared to a contractual facility.

What are the financial reporting requirements when using invoice finance?

If you’ve got a good accountant, bookkeeper or financial director, they will note that you have a floating charge, bank your invoices and log what’s coming in as your aged debt and your aged receivables. It’s business as usual.

Where an invoice has been put down as an aged receivable, that now converts to a debt because you are leveraging that invoice. Your accountant will put that into a different section in your accounts.

Do small businesses have to disclose their use of invoice finance to customers?

No, not all. With a discounting or a factoring facility, some businesses prefer to keep that as discreet as possible, while others are very open about it.

It’s probably a ratio of 70-30, where 70% want to be more discreet. It’s part of the commercial viability of using a facility – because for small businesses it can make you look a lot bigger than you are. Having a lot of cash there gives you that ability to scale.

Are there any alternatives to invoice finance that small businesses should consider?

No, there are no exact alternatives to invoice financing, where you leverage a receivable against what’s about to come in.

If you are looking at other cash flow options, I would always advise customers to go for a structured approach. Invoice finance is a structured approach because the debt gets paid when the invoices get paid. Asset finance is a structured approach because if you can’t pay the debt back, you sell the asset.

Meanwhile business loans are unsecured lending where there is nothing behind it. There’s nothing to pay it back other than you having the ability to meet the repayments. So while there isn’t an exact alternative to invoice financing, it’s not the only way that you can boost cash. You could resolve your cash flow within a company but I would always recommend doing it in a structured way.

How can small businesses find a reputable invoice finance provider in the UK?

A lot of businesses will have business banking, and the likelihood is that your bank offers an invoice financing facility already. You might just need to speak to your relationship manager.

Failing that, you can contact Grand Union Financial – we specialise in invoice financing and commercial financing. We’re a whole-of-market advisory firm and we work with every invoice finance lender out there. We’ll be able to give you a bespoke advisory service tailored to the needs of your business.

What else do we need to know about invoice financing?

Invoice financing is a great, structured way of bringing cash back into the business. If you just want to find out a bit more, please feel free to contact any of us on the Grand Union Financial team.

There are industries and people out there that don’t know it exists. It’s quite interesting to talk to business owners that didn’t know that this could be done – so it’s not being promoted as it should be. But it’s been in existence for over 20 years. So if you struggle with your cash flow or want to know your options, feel free to get in contact with me or speak to your bank.