Managing cash flow can be a challenge for small and medium-sized enterprises (SMEs). One of the issues faced by SMEs is the delay in receiving payments from customers, which can have an impact on their day-to-day operations and overall growth. However, there is a solution to this problem, and it is known as invoice finance.
Invoice finance, also referred to as accounts financing, provides businesses with an opportunity to access the funds tied up in their invoices.
Instead of waiting for customers to pay at their pace, businesses have the option to sell these invoices to a finance provider for around 75 85% of their total value.
So, how does invoice finance work? It’s quite simple. Once a business completes a sale and issues an invoice to its customer, it can send a copy of that invoice to an invoice finance provider.
The provider verifies the invoice and then advances a percentage of its value (usually within 24-48 hours) to the business. The remaining balance, after the deduction of any required fees, is paid out when the customer settles the invoice.
There are two types of invoice finance: factoring and invoice discounting.
Factoring: In this form of invoice finance, the finance provider handles the management of the sales ledger as well as credit control on behalf of the business. They directly collect payments from customers and provide reports to keep the business informed about their invoices’ status.
Invoice Discounting: With invoice discounting, the finance provider provides funds against the value of invoices. The business retains control over the sales ledger and credit control. The responsibility for collecting payments from customers and repaying the finance provider lies with the business.
How Can Invoice Finance Benefit Small and Medium Enterprises (SMEs)?
1. Enhanced Cash Flow: The advantage of invoice finance for SMEs is improved cash flow. By accessing funds tied up in invoices, businesses can bridge the gap between invoicing and receiving payments. This enables them to meet expenses, pay suppliers promptly, and seize growth opportunities.
2. Reduced Administrative Burden: Invoice finance providers handle credit control and payment collection tasks, alleviating burdens on businesses. Instead of spending time chasing payments, businesses can concentrate on core operations, sales activities, and growth strategies.
3. Flexibility: Invoice financing is a funding option that can adapt to the growth of a business. As the business expands its sales and generates invoices, it gains access to funding. This flexibility makes invoice financing a choice for businesses that experience fluctuations or irregular payment patterns.
4. Quick Funding Availability: Unlike bank loans, which often take weeks or even months to get approved, invoice financing provides quick access to funds. Once a business establishes a relationship with an invoice finance provider, it can receive funds within 24-48 hours, leading to improvements in cash flow.
5. No Additional Debt Burden: Invoice financing is not a loan; hence, businesses don’t accumulate debt on their records. Instead, they accelerate the payment of their existing invoices.
This feature proves beneficial for small and medium-sized enterprises (SMEs) that prefer avoiding additional debt or face challenges in securing conventional financing due to a lack of collateral or credit history.
Is Invoice Financing Suitable for All SMEs?
While invoice financing offers many advantages for SMEs, it may not be suitable for every business. Several factors need consideration, including the cost of funding, the impact on customer relationships, and the specific industry in which the business operates.
It’s crucial for businesses to carefully assess whether invoice finance is suitable for their needs and objectives before choosing this funding option.
Invoice finance can be a tool for small and medium-sized enterprises (SMEs) seeking to address cash flow challenges and expedite their growth.
By unlocking the funds tied up in invoices, businesses can enhance their cash flow, streamline tasks, and gain greater flexibility.
Nevertheless, it’s essential for SMEs to evaluate the appropriateness of invoice finance based on their circumstances and consider multiple financing providers in order to find the best fit for their requirements.