What is Invoice Finance?
Invoice Finance is an extremely popular form of business funding amongst UK businesses across all sectors, in which firms are able to gain immediate access to most of the capital that is held up in their outstanding debtor book.
Invoice Finance can be known by a number of different names including factoring, invoice factoring, invoice discounting, confidential invoice discounting and CHOCS, but they are all variations on fundamentally the same concept.
The UK Invoice Finance market is large and growing rapidly. Almost all the high street banks have an invoice finance offering and there are dozens of other independent invoice finance and factoring businesses able to provide funding to businesses in every sector.
Some of the sectors in which invoice finance is particularly popular are:
- Warehousing & Distribution
At any time most businesses will have payments due to it from customers for work they have completed but not yet been paid for.
These outstanding payments make up the businesses outstanding debtor book. The amount of funds outstanding to a business at any one time can be found by the business running an aged debtor report from their accounting software.
Depending on the payment terms that a firm has agreed with its clients this money may be outstanding for anything from a few days to several months, and by using an invoice finance facility businesses can access a valuable stream of cashflow earlier than they otherwise would.
The process is very simple. The business enters into an agreement with an invoice finance provider to sell these outstanding invoices for an agreed percentage of the full cost. Depending on the industry this can range from 60% to 95% but is commonly around the 80-85% level.
The invoice finance provider will then advance this agreed percentage immediately providing the business with the bulk of the funds due for immediate use.
A common misconception amongst some businesses is that this initial payment is all the funds they will receive. If this were true then invoice finance would be a punitively expensive funding option and no one would use it.
The reality is that this initial payment is simply the first part of the funds that the business will receive.
What happens next is that the invoice finance provider waits for the businesses customer to eventually pay the outstanding invoice, and it will then advance the rest of the funds to the customer, deducting their costs for making the facility available.
By way of context, the invoice finance provider will typically want between 1% and 3% of the total invoice value for providing the facility. The percentage range will vary based on overall business turnover, industry sector, length of time funds are outstanding, the number of invoice raised, quality of the customer base and other factors.
So in most cases businesses will ultimately receive between 97% and 99% of their original outstanding invoice amount – with between 60% and 95% released immediately and the balance coming later – which makes invoice finance an extremely competitive funding option for most businesses.
Invoice Finance Benefits
Invoice Finance offers many benefits to UK businesses, including:
- Cashflow Benefits – the most obvious benefit from using invoice finance is the immediate boost to cashflow it offers. Whilst a firm is waiting to be paid by its customers for work already done, they will still have immediate costs of their own to meet, including wages, rent, utilities, taxes, payments to their own suppliers – funds for these costs must come from somewhere and there is an inevitable squeeze on available cash reserves, if any exist. By engaging an invoice finance facility businesses can have immediate access to the bulk of money due to them which means less reliance on other forms of borrowing, and more flexibility when it comes to day to day business decisions.
- Savings Benefits – whilst there is a cost for having invoice finance, there is also a potential to save money as a result of access to funds. Remember, every business is some other businesses customer. Many firms are willing to offer a discount on their prices for quick payment and a firm that uses invoice finance can use this to reduce their costs and save money. We have seen plenty of examples of this including one firm who were offered a 10% discount for payment on delivery rather than having their usual 90 day payment terms. This 10% saving was much more than the cost of the invoice finance facility they were using to fund the earlier payment. Asking suppliers whether they will provide a discount for early payment can unlock unexpected cost savings.
- Admin Benefits – chasing the payment of outstanding invoices is never a pleasant experience and can lead to an increased admin burden and additional staff costs. Many invoice finance options include the ability for an outsourced credit control function, meaning payments are managed and chased by the invoice finance provider and allowing the business to focus on fulfilment and sales, rather than chasing debts.
- Growth Benefits – having healthy working capital can unleash genuine growth and expansion for many businesses who would otherwise be held back by the lack of funds required to secure new contracts, or to invest in their staff numbers, or for any other business growth project. What would an extra 10%, 50% or 100% turnover growth be worth to your business if you could access the additional capital needed to get to that level for a cost of between 1% and 3%? How straightfoward a decision would that be?
Types of Invoice Finance we offer
There are several forms of Invoice Finance, all are variations on the fundamental theme of releasing cash from outstanding invoices that have been raised but not yet paid for. Here we explain the main differences of each.
- This is what is called a “disclosed” facility, which means that the invoice the business sends to its customer requests that payment be made directly to the invoice finance provider. The fact that the business is using invoice finance is therefore “disclosed” to its customer.
- This means that the invoice finance provider “owns” this outstanding debt and can pursue the debtor for payment should it not be forthcoming within the agreed timescales.
- The business will benefit from the immediate cash made available from the invoice finance provider, and will receive the bulk of the balance when their customer eventually settles the invoice.
- With a full factoring facility, all the invoices must go through the factoring facility under the terms of the agreement with the invoice finance provider.
- This is a suitable method of funding for most businesses in which confidentiality of funding is not a critical concern and who may wish to benefit from the funder managing the credit control function.
- CHOCS stands for Customer Handles Own Collection Service.
- It is exactly the same as factoring facility as detailed above, except that the customer is responsible for managing their own credit control function, and chasing their customers to make payments.
- This can be attractive to businesses as it can mean a cheaper facility (as the invoice finance provider is not charging to use its staff to chase debts) and also allows a business to approach their customers in the most appropriate way and ensuring the business relationship can be protected.
- This is a great option for businesses that are happy to do their own credit control and also wish to exercise a flexible approach when chasing individual clients for payment.
- This is what is called a “non disclosed” or “confidential” facility. The businesses end customer will have no knowledge that the business is using an invoice finance facility as they receive invoices from them with no mention of any invoice finance provider disclosed on the invoice. They will pay the business directly on their normal agreed payment terms, and will not be approached by the invoice finance provider.
- Behind the scenes, the business has an agreement with the invoice finance provider to receive an advance against the invoices they raise in exactly the same way as they would with a factoring facility.
- The business is then responsible for managing its own credit control functions and collecting the payments from their customer.
- When funds are finally received these are collected by the business and their original advanced payment plus the facility charges are paid to the invoice finance provider.
- As there is less work involved from the invoice finance providers position this can often be a cheaper option for a business however they have more hands on involvement in the process.
- Due to the nature of this facility it tends to be offered to businesses with annual turnover of £1M+, however in recent times this level has been reduced by some lenders.
Selective Invoice Finance
- This is a form of invoice finance which allows a business to choose or “select” which invoices it wishes to raise money from.
- Rather than all invoices being put through the same facility it may be the case that a business has one or a small number that it would benefit from a payment advance on, but that they are happy to wait for payment on the bulk of other invoices, or that they may be paid very quickly for most invoices and one or two take a lot longer to be paid.
- In these cases a full factoring facility may not be suitable, but an “as and when” facility would be useful.
- The cost of this facility can be double that seen in full factoring, however it is limited only to the invoice being lent against, and there is no ongoing commitment or fees other than when used
Why choose MacManus Finance for Invoice Finance?
There are so many invoice finance providers in the UK, so businesses will be poorly advised to approach invoice finance providers directly as there is so much variation in product, service and pricing that the best option, and most suitable funder, will likely be missed.
Some firms approach their bank as the obvious solution, however due to the large number of clients the high street banks have, the product and service is largely homogenized to a “one size fits all approach” and businesses get lost in “the system”, with poor levels of customer support reported.
A far better approach is for businesses to engage the services of a skilled and well connected independent business finance broker, to help them navigate through the various options available, and to identify the most suitable funder.
As invoice finance is a product that firms will engage with everyday, it is really important that the most suitable funder is matched with the right business.
For some firms, price is the primary driver, for other it will be the percentage advanced, for others it will be the customer service aspect and ease of interaction with the lender, or their flexibility in adapting their offering
Invoice Finance is generally not a facility that falls under the oversight of the Financial Conduct Authority, and as a result has a reputation for attracting less than scrupulous brokers into the marketplace.
Businesses should understand that not all brokerages are of equal standing or reputation, and whilst FCA oversight isn’t required to operate in invoice finance, one should ask why a serious and respectable brokerage wouldn’t be.
Before engaging any broker, businesses should look for a brokerage who are Authorised and Regulated by the Financial Conduct Authority and are full members of the National Association of Commercial Finance Brokers trade association, as membership of both requires firms to demonstrate the highest standards of integrity and submit to consistent monitoring of activities, providing the business owner with confidence in the firm they have chosen to work with.
If the broker is not a member of both, ask them why they are not, and give careful thought as to whether they are a suitable firm to engage with.
MacManus Asset Finance are a brokerage of suitable standing and reputation – directly authorised by the Financial Conduct Authority, full members of the National Association of Commercial Finance Brokers, and with a customer base of almost 300 UK businesses whom we have supported for over 15 years.
Our business ethos is built around the idea of “Never Just a Number” – and we take pride that our clients never feel like they are just a number to us, as so many business owners are made to feel by larger financial institutions.
Your business success is our business success, we never take our clients for granted, and will always aim to deliver more than our clients expect.
How to apply for Asset Finance with MacManus Finance
We make your invoice finance journey as simple as possible.
From your first call, email or completed webform we will act as your trusted partner, understanding your objectives and putting together options for you to consider.
We may need to ask you some general business questions and ask for some financial information from you in order to carefully prepare your personalised quotation from our funding panel.
We then liaise with our funding panel and identify two or three suitable options for you to consider.
If any or all are of interest we put you in direct contact with the lender to ask any questions you may have and progress the process to the next step.
Our brokerage service is entirely without obligation or cost so you have absolutely no risk in engaging us to take the strain and to guide you in the best direction.
To begin please call 01443 800621, email firstname.lastname@example.org or complete the webform above.