Invoice Finance (IF) is where businesses borrow money against the amounts due from customers. This can improve cash flow, pay employees and suppliers, whilst also enabling reinvestment in operations and growth earlier than anticipated (not having to wait until their customers pay their balances in full).
IF can be a vital product to ensure sufficient working capital for both day to day costs, as well as growth or acquisition ambitions. It can also be important to ensure overtrading doesn’t occur.
IF, at present, is fundamental in order for businesses to regrow revenue and revert back to pre-
COVID levels and beyond. A misunderstood product in the market, Invoice Finance is used by some of
the most well known and successful businesses in the UK. In 2020 alone, Nordens have raised over £5 million in finance for our clients.
What is Invoice Finance?
Invoice Finance is one of the most powerful Business To Business (B2B) funding products available in the market. With approximately £80bn of cash flow provision annually, it provides a huge injection boost for businesses in need. However, looking closely at the number of SMEs using IF in the UK, approximately only 40,000 businesses (6.67% of all SMEs in the UK) are benefiting from this product.
When used CORRECTLY, IF offers a very cost-effective way to leverage business assets in order to generate funding. Invoice Finance, as a product, is simply when a business ‘sells’ an invoice to a finance provider.
This can be a single invoice or the full debtor book. The finance provider will pay the business up to 90% of the value of that invoice upfront, with the remainder being paid as per normal trading terms minus lender fees.
Typically Invoice Finance is seen in the following sectors:
• Recruitment
• Wholesalers
• Manufacturing
• Engineering
• Construction – specialist construction IF applies
• Transport
What are the pros and cons of Invoice Finance Lending?
PROS
• Fully flexible to suit the business requirements.
• Often able to obtain far greater credit lines as you are leveraging the assets within the business.
• No tangible security required (which would be for sizeable overdrafts).
• Sometimes no or limited personal guarantee needed.
• Debtor protection can be added for a fee.
• By transferring the responsibility of credit control to the lender it can free up valuable time and money (invoice factoring).
• Debtors, as proven, are more likely to pay on time when lenders control ledgers or chase invoices.
• New facilities can be drawn in a week to 10 days.
CONS
• Can take a couple of months to put in place for complex structures (overseas or Trade Finance).
• Often (incorrectly) associated with failing businesses.
• Can exceed debtor concentration restrictions.
• Not suitable for business with short debtor days.
To discus the Invoice Financing or anything accounting related in general, please don’t hesitate to get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query. Alternatively, if you to find out more about our Corporate Finance department, check out our dedicated section.
