How Can Invoice Financing Help My Cash Flow?

By obstructing cash flow, late payments can pose a serious threat to a business. But invoice financing may be the solution you’ve been looking for.

Nic Redfern Published on 06 May 2020. Last updated on 23 February 2021.
How Can Invoice Financing Help My Cash Flow?

Late payments are amongst the most serious causes of cash flow issues. Some businesses are forced to wait weeks, sometimes months, for their customers or clients to pay their outstanding invoices.

And with a great many companies selling to retailers or wholesalers on credit—it means the customer is not obligated to pay their invoice immediately—delays can mount up and stem cash flow.

Poor cash flow is not only a hindrance to a business’s operations, but also has the potential to damage its reputation if payments to suppliers and staff are late. According to Hitachi Capital UK’s 2019 report Late Payments: The Cost to Business and Our Health, late payments cost the 5.9 million SMEs in the UK over £50 billion a year.

In 2019 alone this led to 1.9 million employees facing delayed payments, and 40% of businesses were forced to use their own funds to close cash flow gaps.

Businesses that find themselves strapped for cash struggle to source working capital, and the prospect of taking on more debt is often a scary one. Companies in this situation have traditionally either taken out a business loan or struggled on without cash.

Indeed, many opt for the latter because it seems less risky than taking out a loan—but they could consider the faster, more flexible alternative of invoice financing.

What is invoice financing?

Invoice financing enables companies to acquire a cash advance on unpaid invoices, often at a rate of 80–90 pence per pound. The cash is transferred straight away—and when the original debtor pays the invoice, the business receives a second payment on the outstanding sum.

There are certain fees involved in invoice financing, most importantly the percentage of the owed invoice which is paid to the finance lender by way of a service fee. There is also a finance fee, calculated as a percentage of the amount lent.

However, many businesses may consider these fees a minor issue, as invoice financing enables them to access as much as 90% of the value of their unpaid invoices during times when their cash is tied up by late debtors.

For more information read our guide to invoice financing.

How invoice financing can help your cash flow

Make repayments only when money comes in

Invoice financing is not generally repaid until the original invoice has been settled. What’s more, businesses utilising this service are not generally making fixed-term repayments, which is great news for cash flow.

No extension of long-term debt

Whilst a traditional business loan is carried on the balance sheet for over a year, invoice financing accelerates your company’s access to the money it’s owed. This is then generally repaid quickly, making it an efficient short-term solution to cash flow problems.

State how much you need—and how often

In the past, invoice financing could mean selling your entire accounts receivable, but if you choose to take out credit with invoice financing today then you control the book. Furthermore, invoice financing is typically paid back over months, not years, so you can always borrow again further down the line should the need arise.

Feel more confident about major projects

The cost of big jobs often weighs heavily on SMEs, and payments may be slow if a major corporation is involved. Invoice financing, on the other hand, enables directors to take on lucrative contracts that may well have otherwise stretched them too thin, allowing them to grow their business in situations that would historically have only hindered them.

Apply in a matter of moments

The application process for invoice financing is quick and easy and doesn’t require you to leave the office. You can simply connect your provider with your online accounting software, flag those unpaid invoices that you wish to finance and apply there and then. There is no paperwork; in fact, some apps now enable you to complete the entire process on your phone.

Bookkeeping takes care of itself

Some providers will automatically track part-payments and fees against each invoice that has been financed and update your online accounting software with this information. This can prove invaluable in the streamlining of your company’s bookkeeping process.

How to choose an invoice finance provider

Firstly, enquire about the fees involved. Some lenders require only one or two straightforward, easy-to-understand fees, whereas others have complex fee structures masking high costs. It’s also worth looking into a provider’s finance model, as this can affect how much money is available for advance and when it needs to be repaid.

What happens if your debtor does not pay? It’s worth asking a potential lender if they will shoulder the risk of this occurrence or whether you will instead need to pay the money back.

Furthermore, will the provider be in control of all your invoices, or will you be granted the freedom to select those you finance?

Finally, remember that your lender may take the responsibility of chasing unpaid invoices. This can save you time, but may also mean you lose control of the relationship with that customer. The provider may indeed insist on receiving debtors’ invoice payments as part of their service.

Is invoice financing right for me?

Hitachi Capital UK reported that almost half of invoices are paid late, with 20% late to the tune of three weeks or more. This deprives many British companies of cash flow, which makes it harder to hire staff, pay bills and purchase inventory. Ultimately, late payments may even hinder you from growing your business.

With the chasing of outstanding invoices left to your provider, invoice financing can leave you to refocus your energy on the day-to-day running of your business.

However, although invoice financing may prove an effective method of remedying the cash flow problems your business faces because of late payments, you may wish to consider also the implications of handing over the reins for the customer relationship to the provider.

Comparison resources can help you take back control of late payments and compare invoice financing options. Concise, impartial comparisons could be what you need to help your business stay afloat—even if your debtors are not forthcoming with payments.

About the author:

Finance Director at NerdWallet UK and business adviser to SME's Nic is spokesperson for small and growing businesses with a strong understanding of the financial needs of business Read more

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