Invoice finance is one of the most flexible finance products for UK businesses today. This articles explains exactly what it is, what the benefits are and why it is so popular.
One of the great things about running a business in the 21st century is that if you’ve got a problem or difficulty, you can be certain of two things. The first is that there’s someone who has been in your shoes. The second is that there’s someone else who has not only come up with a solution but has made a successful business out of providing it.
When it comes to cash flow, you can take these principles and double, treble, quadruple them. For SMEs and new businesses in particular, running short or even out of cash is the biggest threat to viability. There are a variety of solutions available, and invoice financing is one that has attracted plenty of publicity over recent years.
What is invoice finance?
There are different types of invoice financing, but conceptually, the term describes the facility to borrow money from a third party on the strength of outstanding invoices. Invoice financing is a highly convenient way to raise funds when they are needed quickly, either to navigate a natural dip in cash flow, or perhaps to make cash available to buy resources for a major project.
How does it work?
The exact mechanism depends on the type of invoice finance you choose, but essentially, when a company enters into an invoice financing arrangement with an external provider, it continues to do business as usual, and invoice clients in its conventional way. However, it receives a percentage of the money from the financing company immediately. The business then chases those invoices for payment as and when necessary, and once the invoice is paid, it receives the balance, minus the pre-agreed fee for the financing company.
Benefits of invoice financing
The statistics speak for themselves.
Invoice financing typically raises three times more cash than other financing options, such as a traditional business loan.
The really elegant part of it is that as the business grows and sales increase, so does the borrowing power. It is a far more flexible way to raise cash than other financing methods, and a decision can usually be reached much faster than when applying for a loan or an overdraft.
While the concept of invoice financing has been around for decades, its profile has really escalated over recent years. The invoice financing industry has grown by more than 350 percent since the turn of the millennium. A larger market means more choice, which can only be good news for those looking for a cost-effective way to raise funds.
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Why has invoice financing become so popular?
In part, the rise of invoice financing is due to the general shift towards alternative finance options since the financial crisis ten years ago. It is interesting to note that over the course of 2008 alone, the number of businesses using invoice financing shot up by about a third, from just under 49,000 to around 67,700.
However, another factor that cannot be underestimated is that over the same period, late payers have become a bigger drain than on SMEs than ever before. There is a total of £67 billion in unpaid invoices out there at any one time, a number that is rising every year, and more than 20 percent is money owed by large companies to small ones. Invoice financing is the perfect way to redress the balance.
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