In this series of blog posts, we will shine the spotlight on a specific business finance product, discussing the pros, cons, risks and solutions of each. So, if you are interested in learning about the funding options available to you and your business, you have found yourself on the right website.
This week, we explore the subject of invoice finance; a financial product used by millions of UK businesses. From startups and established SMEs to large and international corporations, invoice financing has been supporting a whole gamut of businesses during these unprecedented times.
What is Invoice Finance?
In a nutshell, invoice finance is a product that allows businesses to raise cash (working capital) against the value of their invoices. The benefits to this form of finance are that businesses can be paid for the work they have completed as soon as they have issued the invoice, not experiencing the crippling impacts that can come from having late payers on your books.
Example...
Usually, businesses can access between 50-90% of the gross value of an invoice amount. For the below example, we will use a 75% product, which is around the average during the current climate.
If you have an invoice of £1,000, you can draw down £750 as it is raised. It is repaid when the invoice is paid by your client. The money is paid directly to the lender via a trust account and the balance is cleared plus fees. Therefore, you will receive the balance with fees deducted.
For an invoice of £1,000, there will likely be a 1% per month fee (12% per annum). If the invoice is settled by the client within a month, you will have to pay £10 in fees. £240 would be paid back to you, clearing the balance.
This is a great product to fund growth and provides businesses with access to more capital as their sales function grows. Sectors this product suits are:
- Inventory
- FMCG
- Recruitment
- Temporary/contract companies
- Any business that allows customers credit terms of 30, 60 or even 90 days.
Like any finance product, there are a few cons or things to be aware of.
Below, we look at the most important:
Customer concentration: you will be capped with a certain amount per customer which can bring the “real” percentage down from the headline rate of 75%. If you have one large client with sales of £100,000, you would usually receive a drawdown of £75,000. However, if your client has a credit rating of £50,000 it will be capped at a £50,000 draw down. This is important to know when planning for financial growth as such an agreement can be a restriction.
Funders - different funders have different risk appetites. Where some will allow double and even treble the credit limit, others will not. Please note that those offering higher percentages will of course come at a higher cost/interest rate to you and your business. This is why it is always worth weighing up ALL of your options and comparing rates from numerous trusted lenders.
Credit control - some products will take control of the debt collection for you. But, it is important to remember that you will incur more costs if your customers pay later. The burden will almost always be on you - the longer the debt is unsettled, the more charges you will accrue. This is why it is advisable to chase the debt and try and get your clients to pay as soon as possible.
Credit insurance - funders don’t like risk. This is why they will ask for credit insurance against your customers. This can be expensive and needs to be considered when costing/considering this business finance solution.
CBILS and invoice financing - we could not write this blog without mentioning CBILS. This is because the scheme covers invoice finance, something many business owners are unaware of. The scheme increases the percentage of the invoice amount available to loan by an average of 30%. In our example of 75%, you could (in theory) lend 105% of an invoice. This is unlikely but 100% has been achieved many times by our team.
Compare Invoice Finance Options
Here at Lime Advisory, we work with a vast number of invoice finance lenders, giving our clients a ‘whole of market’ view of their options. To discuss your invoice finance options, contact us today.
