Late payments are a persistent problem for SMEs in the UK and funds that are tied up in unpaid invoices can restrict a business’s ability to operate effectively.
Rather than waiting for the money to eventually manifest, invoice financing allows businesses to improve cash flow while the balance remains unsettled.
For SMEs with thinner cash reserves, knowing how to utilise invoice financing can strengthen business growth even if payments are consistently late.
What is invoice financing?
Many forms of finance require something to be used as collateral and invoice financing uses unpaid invoices for this purpose.
This means that the loan is taken out against the income that is due to enter the business’s account, rather than anything the business currently has.
Many lenders offer up to 95 per cent of the invoice’s total value and this can alleviate the pressures that would build if a business were to wait the length of time needed for the invoice to be paid.
Once the customer has paid, the remaining balance of the invoice’s value can be settled and lenders will typically deduct a service charge and discount, depending on the value of the loan.
Invoice financing may enable SMEs to be more flexible with payment terms given that they can still access capital when it is most needed for business growth.
When is invoice financing a good option?
If contract terms or overdue invoices regularly delay payment, then invoice financing can provide breathing room for your business.
When the injection of funds is used well, it can help to cover running costs or initiate new projects and other measures that may strengthen growth.
However, businesses need to be mindful of carelessly utilising invoice financing as it is not a catch-all solution to every problem.
Businesses with narrow margins may struggle to use this form of financing as the fee structures could damage profitability.
As the value of an invoice is the determinant for the value of the loan, businesses with smaller invoices are less likely to find invoice financing particularly helpful.
Ultimately, seeking the advice of an expert accountant is the best way to determine whether invoice financing is suitable for your business.
Our expert team can review your position and support you in understanding the most effective approach for your business.
Speak to our team for expert support with invoice financing.
