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Invoice Finance

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Invoice finance is a form of asset finance that lets you borrow money against your outstanding invoices. We explain how it works and how to decide if it’s right for your business. 

What is Invoice Finance?

Generally, with invoice finance you sell your unpaid debts to a third party company. They pay you a percentage of the total owed. That company then follows up the debts on your behalf. You receive the payments, less a service fee from the invoice finance company.

Invoice finance can be a good way to release cash tied up in your sales ledger. It is also known as receivables finance. 

Advantages and disadvantages of Invoice Finance

The main benefits of invoice finance include:

  1. Confidentiality – your customers won’t usually know that their invoices have been sold. 
  2. Flexibility – you can sell outstanding invoices for your goods and services as and when you need to. There are no lock-in contracts. You have full control over when you want financing, the terms and price.
  3. Speed – invoice financing is much faster than getting a typical bank loan. You may receive payment within 24 hours, boosting your working capital.
  4. More borrowing – you can usually take more money via invoice financing than via a loan or overdraft.

There are two main disadvantages of invoice financing, which could limit whether this is a potential approach for your business: 

  1. Invoice type – Because the finance provider is taking a risk with your invoices, most companies will only choose invoices issued to creditworthy customers – that is, larger businesses. If your customers are usually small firms, invoice finance may not be available to you.
  2. Costs – Providers charge a fee for the invoice finance service – usually a percentage of the invoice total. You will get earlier access to funds, but at a cost.

What are the different types of Invoice Finance?

There are two main types of invoice finance: Invoice Factoring and Invoice Discounting

With Invoice Factoring you sell outstanding invoices to a third-party commercial finance company. The factoring company takes responsibility for collecting the invoice payments.

Invoice Discounting is a way of borrowing money for the short term against outstanding invoices. You sell unpaid invoices to a lender, in exchange for a cash advance. The lender then gives you the remaining balance after your customer pays the invoice. Around 80% of each advance invoice can be converted almost instantly into cash.

How much does Invoice Finance cost?

Most invoice finance companies offer a variable fee structure. How much you pay will depend on the value of the invoices you hand over and the length of time it takes your clients to pay. 

The higher the value of invoices the lower your discount rate will be, and they usually range between 1.5% and 5%. Some providers of these finance products offer a flat fee structure, with a one-off, upfront fee. 

Can a start-up/small business get Asset Finance?

Asset finance is where a company uses assets such as investments or inventory as security to borrow money. It’s a helpful, short-term funding solution and is usually easier and more flexible than traditional bank loans. 

For growing businesses and start-ups especially, it provides an easy way to increase working capital. Invoice finance is a form of asset finance that is often used by small businesses and start-ups. 

How can a broker like GPS Financial help me with Asset Finance?

If your company is seeking business finance, we’re here to help. It’s important to explore all the options for your specific situation. Selective invoice finance can be a good solution, but there may be other ways to achieve your goals, which we will look at with you. 

Bear in mind that invoice finance is not currently regulated by the Financial Conduct Authority, so it’s important to seek advice. We work with a wide range of providers to find the most appropriate deals subject to status. 

Contact our registered office today for an initial conversation about how we can help you. We’re here to support you with any business finance concerns, from accessing an invoice finance facility to improving credit control.

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