What is Invoice Finance and How Can it Help your Business?

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Written by Michael Foote, Insurance and Finance Expert

Michael Foote is the founder of Quote Goat and has over 13 years experience working in the finance, insurance and currency sectors. Since launching Quote Goat he has appeared on TV as well as many of the largest online publications including Forbes, The Telegraph and The Metro. Prior to Quote Goat, he worked in finance in the city for a number of firms including HSBC.

As a business owner, every now and then you might experience one or two difficulties and require some extra funds to tide you over. Whether trade has been a bit slow, you’ve forked out for some new equipment or you’ve been forced to close due to the recent coronavirus restrictions, it’s always reassuring to know you can borrow money to help you weather the storm.

In the past, finance options were limited. If you wanted to borrow money, then pretty much your only option was a bank loan. Nowadays, things are a little different and there are a number of options available to business owners who require access to capital.

Along with the usual suspects, one of the newer and lesser-known options is invoice financing, but what is it and how does it differ from other more traditional forms of finance? Let us explain…

What is invoice finance?

In a nutshell, invoice finance is an asset-based finance facility where a business borrows money against accounts receivable (invoices). If a business is experiencing short-term cash flow issues then the problem won’t be helped by outstanding invoices, so invoice financing can help to ease the pressure by giving you early access to the money you’re owed. The downside is the lender will take a percentage of the money and you’ll need to pay fees for the service, but how much will depend on the lender you choose.

Advantages of invoice finance

No collateral – With a traditional business loan, you may be required to put up collateral. This is because in some cases the bank may see you as high risk, therefore they’ll want to know they can recover their money if you default on your payments. This can result in some people losing their home or assets, but with invoice finance there’s no risk of this as you won’t be asked to put up any collateral. You could say the invoices themselves are the collateral, but you won’t be asked to use anything else so the risk is massively reduced.

Faster decision – If you’ve ever applied for a regular loan, you’ll know it can be a painstaking process. With lots of credit checks and other paperwork to carry out before a decision is made, it can take months until you receive access to the funds – and that’s if you’re successful, which many people aren’t. When you apply for invoice finance, your application will be completed much quicker and you should have access to the money in a matter of days.

Higher approval rate – While banks reject many applicants who apply for loans, for invoice financing the criteria is less strict, meaning you’ll have a higher chance of being approved. This can come in particularly handy if you have poor credit.

Amount you can borrow grows in line with your business

As the credit line is based on the value of your invoices, you’ll only ever be able to borrow money relative to your revenue. This means you won’t be able to get access to too much capital, which is a mistake many business owners make, and one with potentially severe consequences.

You can offer more flexible payment terms

Waiting long periods of time can affect your cash flow and really stunt your growth as a small business. However, if you’re using an invoice finance facility, you can offer your customers longer payment terms, which can make your business seem more attractive to potential customers and stop them going elsewhere.

So now we’ve explained the basics of invoice financing, hopefully you now have a good understanding of how it works, as well as how this form of borrowing can help your business. If you’d like more information then speak to a member of our team today, or to see deals from some of the market’s biggest providers, compare invoice finance with our trusted comparison page.