Many businesses have outgoings greater than their income, especially during these difficult
times. Late payments from customers certainly don’t help and can exacerbate any cash flow
problems, which can then affect everything from paying rent and staff costs to buying stock.
Thousands of SMEs now rely on invoice finance to help them when it comes to cash flow
problems caused by late payments.
But can this funding option help your business?
How does invoice financing work?
Invoice financing is certainly a strong option for many SMEs, and it allows you to raise cash
against the value of unpaid invoices. If your business offers 30, 60 or 90-day payment terms
to your clients, this financing option can help to remove long wait times and solve the issues
around late payments that can lead to cash flow problems.
If your SME is using a standard invoicing finance facility, you will invoice whenever the
business delivers goods or services. You’ll then forward the invoices to your factor on the
same day, and (depending on the terms of agreement) receive 80% to 90% of the value of
the invoices, within 24 to 48 hours. You then wait until the invoice is paid and settle the
account with your factor.
Interest rates and fees can often be lower by going through this method, as it uses a tangible
asset as collateral. It can also be more consistent to choose this option, as it will pay out
every time an invoice is issued by you to a client. This means you will get a steadier stream
What is invoice factoring?
A specific type of invoice financing is known as invoice factoring. This involves outsourcing
your SME’s sales ledger to the factoring firm your company is borrowing from. You will still
issue invoices as usual to clients. However, the factoring firm will be responsible for chasing
them. Clients will then pay the factoring company, as opposed to you. Generally speaking,
the remaining value of the invoice will then be paid to you by the factoring company, minus
These agreements can be ideal for SMEs because you can gain the benefit of your factor’s
in-house resources, along with their experience when it comes to credit control. This can
also allow your business more time to grow.
It is really important that you do a thorough cost/benefit analysis before you choose an
invoice financing service. This type of service can help to smooth over cash flow issues
caused by late payments, but it’s important to consider all of the options available to you.