What is Invoice Financing?
Whenever a business sells goods or services on credit terms it issues an invoice to its customer and then has to wait to be paid.Invoice financing is a way to give your business's cash flow a boost by raising finance quickly to bridge cash flow gaps and release capital tied up in unpaid invoices.
Invoice Finance Payment Terms
Typical payment terms may be 30 days or 60 days either after invoice date or the month end in which the invoice is issued. Invariably, terms are exceeded, which results in a drain on the lifeblood of the business – cash!
Invoice finance allows a business to gain a pre-payment of up to 85% of the invoice value on the same day the invoice is issued, which provides the business with cash much earlier. Such funds can then be used to effectively fund working capital and can even be used to pay suppliers more quickly, which may enable early settlement discounts to be obtained.
Invoice finance has become the most common form of cash flow finance in the UK with almost 42,000 businesses using this type of facility, with aggregate borrowing of nearly £22 billion.
There are various products offered by banks and specialist independent companies, including:
- Confidential Invoice Discounting – credit control managed by the business
- Factoring – credit control is outsourced
- Spot Factoring, also known as single invoice finance
- Recruitment/Payroll Finance
- Construction Finance
Bad Debt Protection can also be added to provide piece of mind if your customer should go bust.
Costs of Invoice Finance
The cost of the facility typically takes 2 forms, in addition to a one-off arrangement fee:
1. Service charge – a very small percentage of the invoice value
2. Discount Fee – interest is charged on the value of the advances taken against the invoices, which is typically a percentage above Base Rate or LIBOR
The fee structure is deal dependent but typically speaking the total finance cost is only between 0.5% and 1.5% of net turnover
Through our many years of experience of arranging invoice finance facilities, we can source the most suitable solution tailored to meet the business needs.
Invoice finance is referred to a third party. Should you have a need for invoice finance you will be referred to a third party provider. Link Mortgages are not responsible for any advice provided by a third party.