In the current economic climate, banks are continuing to limit their exposure to small and medium-sized business finance. Whilst the banks may be reining things in, this hasn’t stopped the entrepreneurial spirit within the small and medium business community in the UK. But if the finance isn’t there from the banks, where is it coming from?
The requirement to provide funding for businesses has seen the development of many asset-based finance solutions such as invoice finance, and several independent factoring providers offering this form of funding.
Here we’ve got a breakdown of what invoice finance is and how it can benefit small businesses in the UK today.
Invoice finance
Invoice finance provides upfront funding against the value of outstanding customer invoices. Small businesses choosing invoice finance will receive an agreed percentage of the invoice (up to 85%) advanced almost immediately after the invoice has been supplied to the invoice financier (this will usually happen within 24 hours). Once the customer pays the invoice the remainder will be paid, minus a small admin fee to the business.
Factoring versus invoice discounting
Put simply, invoice finance can be broken down into two distinct products; factoring and invoice discounting. Factoring involves the control of the sales ledger and collections being taken over by the funder’s dedicated credit control team. This means that the job of collecting the payment from customers and chasing them where the need is, will be taken by the funder; freeing up valuable management time to get on with the day-to-day running of the business. Invoice discounting on the other hand is a funding-only facility and does not include credit control, leaving the individual business to carry out this task.
As a small business it’s important to get an invoice discounting and a factoring quote from Bibby Financial Services, for example, before making your final decision.
What are the benefits?
Key benefits of invoice finance include:
- Access to much-needed cash flow
- Funding solutions that don’t rely on debt (such as bank loans or overdrafts)
- Funding that grows in line with the sales turnover of a business – the more invoices raised the more funds to become available to the individual business
- Credit management and collections
- Protection against bad debt
Is this an option used by small businesses in the UK?
Bibby Financial Services for example has just increased the available funds for businesses in the UK to £430million. This is an increase of £90million and is directly due to the need for alternative finance facilities for SMEs.
The need continues to grow.
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