Invoice financing has become an increasingly popular form of providing short-term cash flow for the business-to-business sector.
In the current economic climate, some companies take full advantage of the repayment terms offered and it can take months for them to settle what they owe, which in turn leaves cash flow strained and suppliers left unpaid. That’s where invoice financing comes in.
Solving the problem traditionally
Put simply, Invoice Finance is a form of releasing cash tied up in outstanding invoices, thereby allowing the supplier access to money before the customer has paid. It can be a useful tool for SMEs who rely on a regular inflow of cash to operate, helping ensure that capital is available to pay wages and bills on time, and control over the business is maintained.
Factoring and discounting solutions required businesses to hand over their entire debtor book for a fixed contract term, and in the case of factoring the consequence can be a loss of control over invoices and a potential breakdown in client relationships.
Charging structures were often complex and difficult to forecast with the result that many have been scared away from this form of finance. Newer options have helped to modernise the market – and it is now possible to finance invoices individually (known as selective Invoice Finance or spot factoring) to maintain more control over the accounts process.
To help explain how invoice financing can support SMEs, we explore the six most common myths:
1. Invoice Finance ties up all customer invoices
Traditional Invoice Finance products often commit a company to hand over their entire debtor book for a fixed term period – which is usually at least 12 months. However, a more flexible option is to finance one-off invoices on an ‘as needed’ basis. By choosing individual invoices, cashflow can be better managed and companies do not have to surrender their whole debtor book, removing the requirement to treat all clients, customers or debts in the same way.
2. Invoice Financing charges are complex and confusing
Invoice Finance can have confusing and varied charging structures. It’s important to properly understand the costs before choosing this type of cashflow facility. Securing funding for selective invoices can provide a more transparent option, as fees are fixed in advance and charged only for funds in use.
3. Invoice Finance is a lender of last resort!
It’s no longer fair to say that companies who use invoice factoring are struggling to make supplier payments on time. High street banks are actively encouraging customers to convert overdrafts to factoring facilities and the current thinking is that many companies use cash flow finance in a positive way to boost working capital and grow the company.
4. It ruins customer relationships
Factoring companies have a reputation for taking a tough line with credit management, which can in turn damage client relationships. It’s important not to underestimate the importance of maintaining positive relationships with clients. Allowing factoring companies to finance the invoice and manage the collections process is no longer a prerequisite. Confidential Invoice Discounting allows you to keep control of the invoice process. You still raise invoices in the normal manner, manage the collections and maintain direct control over customer relationships.
5. Invoice financing is difficult to exit
It’s true that a traditional invoice financing facility would lock companies into a 12-18 month contract, which some SMEs may or may not be happy to sign up to. Newer solutions work on an invoice-by-invoice basis. This removes the need for long-term agreements, providing a no obligation route without ‘lock-ins’ or ongoing charges.
There are many advantages for SMEs who use Invoice Finance to maintain working capital, not least to keep a healthy cash balance and healthy supplier relationships. A wide variety of Invoice Finance providers are available so it is important use an independent advisor who can find the right solution for you.
6. It’s more expensive than an overdraft
Many people believe that invoice finance is significantly more expensive than a bank overdraft. In reality, this is far from true! In fact, most high street banks offer Invoice Finance and therefore access to ‘cheap’ funds.
- The real advantage of invoice finance is that the facility grows in line with your business. Unlike an overdraft, invoice finance facilities are uncapped. There’s no risk of you needing to go ‘cap in hand’ to your bank manager. You won’t need to face the refusal of an increase, or provide any additional security such as your marital home.
The PMD difference
With 50+ lenders in the Invoice Finance market it can be difficult to find the right lender for your business. High street banks may seem cheaper, but have huge numbers of clients, and as a result customer service can suffer.
PMD take the time to understand your business to find the right funder to support business growth. Do you already have an existing Invoice Finance facility? We’ll benchmark it against what’s available in the market. We can even improve on this by either reducing costs or increasing funding. In most cases, we can do both!
We’d love to speak to you about how Invoice Finance can help grow your business.
Get in touch with our Head of Invoice Finance, Mark Millhouse, on 07711 594030 or via email at markm@pmdbusinessfinance.co.uk.