What is Invoice Finance? - Your Accounting Team

July 3, 2021by CBM Accounting1

Invoice financing is a type of short-term credit provided by a bank or lender to its clients in exchange for outstanding bills. Invoice finance is frequently used to address a company’s short-term financial needs.

Invoice finance is a type of financing given by an invoice finance lender to enable business owners to leverage their outstanding invoices and get immediate cash flow. The invoice finance provider will release up to 90% of a company’s invoices immediately.

The lender will release the total amount minus any charges once their clients have paid the invoice. Depending on the scenario and the amount of control, they want in collecting outstanding bills, businesses can choose from a variety of invoice financing solutions.

The simplest way to answer the question “What is invoice finance?” is to state it’s on the rise. There are numerous major causes for this, and several significant events over the last two decades have altered the way small and medium-sized enterprises borrow. To begin with, the financial crisis of 2008 drastically altered the way big banks handled commercial loan applications, which in turn affected the way small firms functioned. Second, the uncertainty surrounding Brexit harmed confidence and resulted in a reduction in conventional borrowing in the United Kingdom. Third, the epidemic has wreaked havoc on both large and small businesses in 2020.

  • It is a never-ending event — the worst and most disruptive in living memory – with far-reaching consequences for firms in every industry.
  • For a long time, traditional funding has been more difficult to get for younger and smaller firms.
  • Customers are paying more slowly during the epidemic, but this has done little to alleviate the severe strain on SMEs to continue paying workers and suppliers.
  • Commercial borrowers require an easy-to-use, cost-effective method of maintaining their cash flow.
  • The cost of borrowing is determined by risk, and freeing up the cash in outstanding bills is a very low-risk venture.

What exactly is invoice financing, and how does it operate?

Invoice financing is a convenient way to borrow money that is secured by the value of your outstanding invoices. A lender advances a percentage of the billed amount to your firm (typically about 90%) whenever an invoice is raised, and some suppliers promise payment within 24 hours.

Depending on the sort of invoice financing, you ask for, either you or the lender will do credit checks, and when your client pays the invoice, you will get the balance of the invoice’s value less the finance charge.

Invoice factoring” versus “invoice discounting:

The sole difference between the two main kinds of invoice financing, invoice discounting and invoice factoring is who is in charge of collecting payments. When picking one of the two options for a business, there are two major considerations to consider, do we want our customers to know we are utilizing the service? Do we want credit control to be outsourced?

The easiest of the two financial models is invoice discounting. You take out a loan against the invoice’s value, but you keep control of the payment collection process. However, with invoice factoring, the financing firm handles credit management, so your clients will know you have delegated the process.

  • Discounting and factoring both operate by advancing a portion of an overdue payment – often about 90% of the invoice amount – and then settling the remainder when your client pays the invoice in full.
  • Many lenders in this sector will demand that B2B sales, not B2C sales, are your primary source of revenue.
  • Invoice finance is available to almost all SMEs, including existing businesses as well as startups and new enterprises.
  • Lenders will frequently require that an owner or director have ownership of a property in the case of brand-new enterprises.

What is the process of invoice factoring?

  • Efforts are made to enhance and anticipate cash flow.
  • Credit control can be outsourced so that businesses can focus on production. The financing firm is in charge of collecting payments.

Implications of Factoring Invoices:

Credit control can be handled by a finance company for smaller businesses, freeing up time to generate new leads or income sources.

The hurdle to accessing this invoice financing option is lower since the finance firm reduces its risk by maintaining your sales ledger. The majority of businesses establish a turnover restriction.

The difficulties of invoice factoring:

The service is not private. Some consumers may be offended that you are outsourcing credit control, particularly if you are a small firm with a tight-knit customer base.

Because invoice factoring includes credit management, borrowing costs are greater than with invoice discounting.

What is the procedure for discounting invoices?

Permits businesses to better forecast cash flow and frees up the majority of the money held in outstanding bills right away.

You control your credit – the technique is completely private, and your consumers will have no idea you are implementing invoice finance.

The Benefits of Invoice Discounting:

  • While invoice discounting delivers the same financial benefits as factoring, it is secret, so you will not anger your consumers.
  • You handle credit management on your terms, which is ideal if you have separate processes for long-term or loyal and trusted customers.
  • Unlike invoice factoring, the cost of finance does not include a credit control component.
  • With invoice discounting, you are not locked into a contract, so you may finance a single invoice whenever it is convenient.

The disadvantages of invoice discounting:

  • Discounting has a higher entrance barrier, with some lenders requiring a minimum turnover of hundreds of thousands of pounds.
  • Before approving a loan, invoice-discounting lenders may wish to examine your creditworthiness and credit control methods.

Brexit, the 2008 financial crisis, Fintech, and the COVID-19 disruption all contributed to the rise of invoice finance:

It has been a turbulent twelve years or more for commerce. The financial crisis wreaked havoc on the economy. There was also a lot of, and it lasted a long time, uncertainty around the Brexit talks. Even when both of these reasons are taken into consideration, as well as the continued impacts of the COVID-19 epidemic, the increase of invoice finance is not the full explanation.

When evaluating how invoice and asset financing have acquired so much traction so rapidly, you must also examine the rise of intech. Fintech’s impact on the conventional lender environment has been described as “disruptive” – and it has only become worse during COVID-19 because cash flow is critical to many firms’ survival.

Many large banks are now collaborating with fintech companies, delivering new products and services that only their nimble counterparts can give, because of fintech’s ongoing effect on lending and the way the industry’s future is considered to be heading.

Many fintech businesses were quick to react during the epidemic, creating and delivering specialized funding solutions to market faster than traditional lenders could.

As we previously talked about, SMEs have adopted that creative approach to financing in 2020, like Brexit, COVID-19, and the impacts of the GFC combined to create very tough trade and borrowing circumstances.

  • The financial crisis of 2008 had a severe and long-lasting impact on business financing. Since 2009, the invoice finance industry has experienced tremendous, continuous expansion — internationally.
  • With a no-deal Brexit approaching, lender confidence was already weak before COVID-19.
  • Small and medium-sized enterprises (SMEs) account for 99.9% of all firms in the UK, and the epidemic has wreaked havoc on them.
  • 38 percent of SMEs are still waiting for payment for work performed before the lockdowns began in March 2020, with an average bill of £58,000.
  • The amount of debt owing to UK SMEs was estimated to reach £67.4 billion in September 2020.

What are the costs involved with invoice financing?

That varies on whether you select factoring or discounting, and, as previously said; invoice-factoring charges are often greater because the lender handles credit management.

Invoice financing costs typically range from 0.5 percent to 5% of the invoice’s value; but as with any loan, your credit score and other circumstances may affect the rate you are provided. The charge is also affected by the size of the invoice you want to finance. Lower-value bills tend to attract lower rates, and higher-value invoices tend to draw higher costs.

In the UK, who supervises invoice financing?

Although the FCA (Financial Conduct Authority) does not currently oversee invoice financing, UK Finance does have a code of practice for service providers. Before you commit to anything in finance, it is a good idea to obtain counsel from your financial officer or accountant – especially if there is a long-term contract concerned.

What specifically is the concept of invoice financing?

One of the most appealing aspects of invoice financing is the structure’s simplicity. Your company sends out bills as normal, but you also notify the lender. They will transmit a percentage of the value after they get all the data. Depending on the invoice finance provider, this might take anywhere from 24 hours to a week.

You will then carry out the terms of the agreement – if it is a factoring deal, the lender will do credit checks following their policies. If you have agreed to a discounted arrangement, you will proceed with payment as usual. When the invoice is paid, the financier will provide you the remaining funds after deducting their charge. Repeat applications are simple and quick to conduct once you have chosen and been confirmed by an invoice finance provider.

Is invoice finance a viable option for my business?

Because invoice financing is a very straightforward approach to maintain a steady cash flow in certain conditions, it has risen in popularity. However, it is a good idea to incorporate it into your overall cash flow forecasts and planning. It is not a good idea to be financially reliant on anything.

Connect us to get more assistance:

Get in touch with CBM Accounting if you would like to learn more about how our accountant can assist you with your cash flow issues and help your business grow during these trying times. You may also receive a free accounting estimate right now.


CBM Accounting

One comment

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CBM Accounting LtdHeadquarters
Serving all kind of businesses for over a decade.
Our locationsWhere to find us?
Get in touchCBM Accounting Ltd Social links
Taking seamless key performance indicators offline to maximise the long tail.

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