What is Invoice Finance?
Invoice finance is an umbrella term for factoring and confidential invoice discounting facilities. Both facilities are designed to increase cash flow, with the financier releasing cash against your sales ledger and advancing cash against ongoing sales. Facilities can be tailored to each individual businesses requirements and can be structured to cover a short term funding need or provide long term cash to help long term growth. Modern facilities are becoming more like overdrafts with minimal reporting required and instant control through apps on your devices.
Factoring is a working capital facility which advances at a set percentage (typically between 70% – 90%) against invoices raised by the business. Factoring facilities are typically disclosed (ie the lenders involvement is notified to your debtors) but they can be confidential. The defining feature of a Factoring facility is that the Lender will assume the role of credit controller and undertake the collection of invoices on the businesses behalf. This has advantages, such as allowing the business owner to fully focus on sales and the growth of the business; but also disadvantages, such as the concern that the relationship between business and debtor could be negatively affected.
Invoice Discounting is a confidential working capital facility. It operates under a similar premise to a Factoring facility. However with an Invoice Discounting facility the lenders involvement in funding the business is kept confidential and the credit control and collection of the business’ invoices remain the responsibility of the business. There are some other subtle differences compared to a Factoring facility. Notably the lender will fund against the sum of bulks of invoices rather than individual invoices. The lender will also set up a trust account in the name of the business and to which payments are made by your debtors.
Benefits of Invoice Finance?
- Boost cash flow: Don’t wait for your debtors to pay. Release cash tied up in your invoices to increase buying power with your suppliers and fund increased orders from your customers.
- Fund growth: Generating cash from your sales early gives your business the competitive advantage to fund increased orders.
- Fund acquisitions: If you are looking to expand through acquisitions generating cash from yours or your target companies sales ledgers by invoice finance can provide the funding required without the need for personal investment.
- Limited security: The invoice finance providers security is the sales ledger. Often they will require a nominal unsecured personal guarantee, however there will be no requirement to offer tangible security, as would normally be the case with term loans or overdrafts.
- Help with collections: Outsource the collection of your invoices to the financier to increase the time you have available to drive growth and sales, whilst maintaining a positive relationship with your debtors by letting the financier have the difficult task of chasing payments.
- Credit protection and credit risk advice: By using your financier’s customer risk departments, you can undertake due diligence into the creditworthiness of your existing and new debtors, and ensure that your growth is safe. Use the financier to protect those sales against bad debts or protracted disputes.
- Flexible facility: The on-going management of an invoice finance facility enables the financier to get close to and understand your business, your issues and your requirements. This makes them best placed to increase your facility as your business grows or your circumstances change.
Uses of Invoice Finance
- Designed to boost cash flow over a sustained period and aimed at leveraging cash against the whole ledger to release an initial advance of cash and then further advances with each invoice.
- Boost cash flow to take on multiple orders.
- Grow safely as the facility grows with your business.
- Negotiate better terms with suppliers.
- Help with long term planning and growth strategy.
- Enable acquisitions of competitors.
- Advancements rates up to 90% depending on industry sector.
- No tangible security required.
How much does Invoice Finance cost?
There are three main fees associated with invoice finance facilities which are detailed below. Many lender have other ‘disbursement’ fees which can add to the overall costs. As such it is best to consult with an expert if you have any questions or queries.
This is the fee for setting up the facility and is typically taken from the initial advance by the Invoice Finance Lender. Usually it is charged as a percentage of the facility funding limit (typically 1%) but can also be a fixed fee amount.
The Service Charge will be the main charge in an Invoice Finance facility. This is applied as a percentage of the sales that are put through the facility. For example if the Service Charge was 1% and you loaded a £1,000 invoice for funding against the Service Charge would be £10.
The discount margin is the interest rate for borrowing the money that the Lender makes available. The rate is quoted as an annual rate but is applied on a daily basis and only against the amount that is being borrowed and only for the duration the money is borrowed.
How Oakmead Finance can help
With over 20 years experience in structuring facilities across all sectors from startup businesses to corporate entities, we are best placed to advise and structure the right facility for you.
Contact us if you would like to explore the invoice finance options available to you or if you would like us to review your existing finance facility.
We were approached by a London based manufacturer of in-flight meals to the airline industry. They had experienced several years of difficult trading due to the loss of several high value contracts, and as a result had to go through an extensive exercise of cost cutting. Despite this, they still shown a weakening balance sheet in addition to several years of losses.
Having traded through this period, they managed to successfully tender for new contracts and the business was anticipating rapid growth on the back of these.
However, due to the losses, their bank was unwilling to increase their overdraft. Consequently, they were finding it very difficult to fund the new contracts they had won, as the payment terms from the debtors ranged from 60 – 90 days.
We had previously helped refinance their warehouse machinery onto better terms when they were reducing costs and they approached their previous account manager to help relieve their cash flow pressure.
We met with the managing director and his financial controller to understand their financial projections in light of the new contracts. This ensured that we knew how a facility would need to be structured to meet their future funding requirements and meant that we could quickly target specific lenders.
We recommended a confidential invoice discounting facility, this would allow the business to retain control of their ledger and the relationships with their debtors, whilst leveraging against their sales to provide the cashflow they needed.
We also recommended that only the 4 main contracts would need to be funded against and all other debtors excluded. This isn’t standard in the industry and was only possible due to our excellent relationships with lenders. This still provided the cash they needed, whilst keeping the costs of the facility as low as possible. To help secure a credit backed offer quickly, we put together a new business proposal for the lenders and were able to present an offer of a facility within a few days of introducing it to the market.
Our asset based lending team consists of specialists who have worked directly in the invoice finance industry. Because of this, we were able to meet with the managing director to talk through and impartially explain the offer, so that they were comfortable with what they would be entering in.
The business then completed a few days later. They received an initial £540k injection of cash against their existing ledger, with a further 85% of the value of each new invoice being advanced on the same day that the invoice is issued to the debtor.
The business has continued to grow on the back of the cash being advanced, and we continue to work closely with them, providing free advice on all renewals to the facility and any amendments that need to be made.
“Richard and his team at Oakmead were exceptional (again).
They are a trusted source of advice for us.”
Oakmead Finance Ltd is a company registered in England & Wales with company number 09478864. The registered office address is Lynwood House, Crofton Road, Orpington, BR6 8QE
Invoice Finance facilities are not regulated by the Financial Conduct Authority.