• Danny Nota

Alternative Finance: Invoice financing for small businesses

In the second instalment of our Alternative Finance series, we look at the option of invoice financing for your business.

Missed our first article in the Alternative Finance series on asset refinancing?

What is invoice financing?

Invoice financing is a way for a business to borrow money against the amounts due to them from commercial customers. It helps a business improve cash flow and it's access to liquid cash otherwise held up in due invoices. A business may need access to cash to pay employees and suppliers or reinvest into business operations. Lenders can fund up to 100% of the invoice amount for a fee (invoice discounting) or up to 90% of the invoice amount (invoice factoring). With invoice discounting, you can retain full control over the collection of the invoice at the end of the term, whilst invoice factoring involves the lender taking over control of the invoice collection.

How does invoice financing work?

When businesses sell their goods or services to customers, they usually do so on credit, for example, carrying out the work and then invoicing the client once it is complete. Quite often a business will then have to wait a period of 30 days or longer before receiving this money, potentially leading to cashflow problems. Invoice financing works to alleviate this by allowing you to continue to operate your business as normal, invoicing your customers for the work you have carried out, but receiving funds a lot sooner. You pass the details of the invoice to your agreed provider of invoice finance and the provider pays you an agreed percentage of the invoice amount, often within 24-48 hours as opposed to the standard 30 days. Depending on your agreement with the invoice financing provider, you will chase the invoice payment with your client as normal (invoice discounting) or the provider takes control of collecting the funds from your client (invoice factoring). To finish, you receive the remainder of the invoice amount, once paid, minus any agreed fees.

What are the advantages of invoice financing?

  • Improved cashflow for the business.

  • The ability to extend payment terms for customers if required, without suffering.

  • It is easy to obtain and most businesses meet the qualification criteria

  • There is little requirement for additional security other than the invoice itself making it a viable funding option for businesses with few assets.

Next steps

It is important to fully assess whether invoice financing is right for you and your business. If you would like to discuss your options further, please contact us here at AssetLend. We are able to advise on all aspects of invoice financing to make sure it is the right option for you.

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