Dr P Singh of Cash for Invoices Limited finds out.
Invoice finance is a form of asset-backed finance –finance where your company uses a valuable asset as a source of finance.
Instead of waiting for the company’s customer to pay your invoice in 30, 60, or 90 days or longer, you can sell your invoice immediately so receive cash now.
Time is money however, so the amount you receive on sale will be less than the invoice amount. This reduction is not a loss, because you could invest the cash received and earn as much as the invoice amount by the time it is due to be paid.
In addition to having cash sooner, another advantage of invoice finance is the transfer of the risk that your debtor will fail to pay. A bad debt could mean you lose the money you were owed by the debtor and a lot more money paying debt collectors and solicitors to recover the invoice amount.
Many invoice buyers will want you to provide security for the money they give you, in case the invoices they buy become bad debts. Instead, they will charge you for bad debt protection.
Some buyers of invoices take on the responsibility and credit risk of collecting debts from debtors, but others will (if you can show you are competent) allow you to continue to undertake this key task.
Some buyers will not disclose to the debtor that the invoice has been sold nor interfere in the relationship you have with your customer (the debtor). The invoice finance is kept confidential rather than being disclosed.
Many invoice buyers will force you to commit to selling all your invoices to them. In addition to being inflexible, you will have to pay several other fees because the arrangement is similar to having a loan facility from a bank. Some companies, however, allow you to sell single invoices and when you choose, which removes the commitment and reduces costs substantially.
When buying a single invoice, the buyer will usually keep a retention in case the debtor fails to pay. They might for example buy your £1000 invoice for £950 but pay you £800 immediately, less their fee, and the balance of £150, when (if) the debtor pays.
There are many varieties of invoice finance, and corresponding costs, terms and conditions. It is attractive as a source of cash, a means of credit risk transfer, and it diversifies your company’s sources of finance. This last feature can be the difference between your company surviving and failing if your usual lender (your bank usually) withdraws its funding.
Is invoice finance for you?
Do you send customers invoices?
Do you need cash?
Have you supplied a good or service?
Do you have an invoice to sell?
If you tick all the boxes, then invoice finance might be right for you.