The Ultimate Guide to Invoice Finance
With the economy the way it is at the moment, some business owners in the UK have found it hard in recent years to get the funding that they need in order to be able to grow their business. Banks are forcing many people to jump through hoops before they consider lending them any money, meaning that cash flow is often hard to come by. All is not lost, however, as this is where invoice finance comes in. So, let’s take a closer look at it:
What is it?
Invoice finance is a way of raising money against any unpaid invoices that your business is in possession of. What it means is if you have an invoice that you have yet to issue a client, you can get an agreed cash lump sum in return for the invoice. What you are doing is you are using the invoice as the asset, rather than as future earnings – and in some cases you may be able to release up to 95% of the invoices value.
How does it work?
Let’s break it down into three simple steps:
1. You perform a service for a customer and you then prepare an invoice to issue to them
2. You then send the invoice to an invoice finance company, such as Finance4Recruitment, and we then offer you a percentage of the final value of the invoice
3. We will then collect the money due to you from the invoice from your customer when it is due
What type of companies use it?
The stereotypical view of the sort of companies that use invoice finance is that they are small companies who exist from day to day and need cash flow quickly in order to meet their costs. At Finance4 Recruitment we specialise in offering invoice finance for recruitment firms but we know that However, the reality of who actually uses invoice finance is quite different. Companies of all sizes in all sorts of industries use invoice finance, including: acquisition and management buyout firms, creative agencies, engineering companies, logistics firms, and wholesalers as well.
Invoice finance can be used by these companies for many different reasons such as to alleviate cash flow issues, to buy essential kit that they otherwise would not be able to afford, for investment purposes or even to restructure the company.
How did it start?
Invoice finance was first used in the 1960s, but it didn’t really grow in popularity until the 1980s. It then really took off in the boom years of the late 1990s and early 2000s and was firmly engraved as a way to finance a business after the credit crunch in 2008. The crunch meant that many banks and financial institutions became more and more reluctant to lend businesses money, and so invoice finance became a popular way for firms to raise money – for many different reasons.
Why is it so popular?
- Anyone can use it – You won’t be credit scored and your don’t need to justify it through your company accounts
- Doesn’t involve assets – you don’t need to put any fixed assets on the line to gain funding – your invoice acts as your asset
- Easy to access – you just need one unpaid invoice to access cash
- Flexible – You can tap into as little or as much money as you have currently lying about in unpaid invoices
- Speedy – You are often able to access the cash you need in as little as 48 hours
How is it different to invoice discounting?
Although invoice discounting and invoice finance both use invoices as a way of promoting cash flow, the main difference is in the way that the invoice is used. With invoice finance, all of the responsibility for the invoice belongs to the finance company once the cash has been cleared. This means that they will need to chase the customer for payment, and they will have to deal with any issues if the customer decides not to pay.
With invoice discounting a lot of the responsibility for the invoice stays with the business to whom the invoice money is owed. The invoice discount company will simply lend the business money which they will then expect to be returned to them once the invoice has been paid.
Look at it like this: invoice discounting is like a mortgage as you are getting a loan against the value owed – and so the finance company will take into account your future earnings before issuing the loan. With invoice finance you are getting a payment that is slightly less than the sum owed on the invoice.
Here at Finance4Recruitment we have been helping recruitment businesses to grow by offering finance for recruitment agencies for over 30 years. If you want to tap into the value of your unpaid invoices then please get in touch with the team today by calling 0161 818 9670 or by email at email@example.com