Invoice finance is the catch all turn for the pre-financing of unpaid invoices from a company. We’ve seen an explosion of invoice finance use from both SMEs and medium sized enterprises right through to larger corporates, as CFOs and finance directors have seen the advantages.
Invoice finance as an industry has also expanded tremendously in the last three years according to the AFBA, yet still, cash flow remains the one of the biggest issues for businesses.
By not waiting 30-90 days for payment from customers, businesses are able to ‘sell’ or ‘discount’ invoices up front, in return for cash, less a fee.
We’ve put together a few tips for those of you who are considering using invoice finance.
1. Understand the fees
Invoice finance isn’t just the interest rate charged on an invoice (typically between 2-10% of the total invoice amount). Financiers are likely to charge additional fees such as an initial fee to open the facility, late payment fees, and due diligence fees. It’s best to collate the fees of any offers you get from an invoice finance company to get an idea on how much the facility will cost over the entire lifetime of using that funding source.
The interest charged and final rate is also dependent on several factors: historic relationship with the company and customer, the customer or suppliers track record / credit rating (if they’re a larger more reputable supplier of finance, in the same country as the company requesting finance, it’s likely to be seen as lower risk), and also the amount on the invoice or invoice ledger.
2. Discounting versus factoring
There are two types of invoice finance. Invoice discounting, which is more common, occurs when a financier lends a company cash knowing that the invoices from the company are security until they are paid by the customer. It is therefore still the companies responsibility to collect payment off the customer, and pay this back to the financier or bank. This type of facility might be useful for one off invoices where the company has a finance team or accountant to manage cash flow.
Invoice factoring on the other hand is where a funder or bank takes control over the sales ledger, proactively managing payments and collecting payments off the end customer. This can alleviate resource from any company wishing to outsource the entire invoice finance process, and is often slightly more expensive than invoice discounting.
Either way, having good systems in place to potentially offer customers a reward / discount for early payment, or perhaps a good accounting system to chase customers if payment is late is good practise. Late payments could often prohibit a company from growing or hiring new staff.
We’ve put together a handy guide on the key differences between invoice discounting and factoring.
3. Negotiate terms
Many company do have leverage and power to negotiate invoice finance rates with banks and funders.
Given the rise of invoice financiers, especially in Australia and the U.K., it’s certainly possible to negotiate with funders and banks to ensure you get a good rate, or have reduced fees.
For this reason we’d also recommend using a specialist invoice finance broker. Commercial finance brokers are experts in both factoring and discounting, having dealt with different companies in multiple jurisdictions, as well as having a good relationship with funders across the business to help negotiate the most appropriate form of funding for the business.
At Trade Finance Global, we work with several companies around the world to help them free to working capital, manage cash flow, and utilise their securities to help them grow. We’ve put together an in depth invoice finance guide and handy infographic if you’d like to find out more.
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