Traditional bank finance has practically dried up in the wake of the financial crisis – and those businesses which do have access to loans and overdrafts are increasingly finding that high street lenders have a very rigid, no-frills approach to providing credit.
It is no surprise, therefore, that more and more finance directors and owner-managers are turning to flexible forms of lending such as invoice finance, which allows firms to obtain vital funds as soon as they bill their customers.
But how do you work out what is the best invoice finance deal for your business?
With a bank loan, for example, the calculation might be somewhat easier – you need to work out whether the cost of repaying the loan is affordable and worth the benefit you will get from the advance. But with invoice finance, there are several other factors to consider.
Costs versus benefits
As with any type of credit, it is important to look at the interest rate you will pay, as well as any other charges. But with invoice finance, these costs need to be weighed against the benefits your business will experience from being able to release money from invoices as soon as they are issued.Also ensure that terms and conditions are clearly set out and acceptable – and that there are no hidden costs.
Business support and service
Many firms which use invoice finance cite the support and advice they get from their lender as one of the most valuable aspects of the deal.
The best providers will take time to understand how your business operates and will work with you to ensure the arrangement you sign up for is appropriate and affordable for your company given its size, financial position and growth plans.
You should also expect leading lenders to have staff dedicated to your firm and available to consult at all times.
Access to cash
The amount of money you can borrow against invoices may vary. The best lenders may give you access to up to 90% of the value of any invoice, with the remainder payable, less fees, when the customer settles their bill. Also bear in mind how quickly any funds will be advanced as the top lenders can ensure you receive them within a matter of hours of the invoice being raised.
Flexibility
Ideally, the amount of money you can raise via invoice finance should increase in line with the invoices that you issue – so the faster your business grows, the greater your ability to borrow. Ask your lender in advance how your borrowing facility will adapt in response to any fluctuations (including seasonal changes) in business.
Scope
If you sign up for invoice finance, you don’t have to borrow against every invoice. Instead, you can choose to raise funds against just one or two every month, for example, to ease cash flow concerns. Bear in mind, however, that if you are raising more than one invoice per month, it could be more cost effective to fund your entire sales ledger.
Credit control
With invoice finance you have a choice between continuing to manage and collect invoices yourself with invoice discounting, or arranging for your lender to deal with this side of your business through invoice factoring. Factoring can free up a lot of management time, but you need to be sure that you are happy for your lender to deal with your customers directly – and for your customers to know you are borrowing in this way.
Protection against bad debts
As part of the invoice finance deal, you may also be able to protect yourself against customers failing to pay their invoices. The cost of this bolt-on product should be weighed against the potential negative impact bad debts could have on your business.
Reputation and track record
Finally, consider the reputation and history of any lender you are considering. Talk to their existing customers if possible to find out what kind of service you can expect to receive; and find out what kind of firms they have already lent to. Which of these factors is most important will vary from business to business, but it is vital to consider all these aspects before you sign-up with a lender.
That way, you will be able to get the finance deal that supports your business today and in the future.
Key takeaways:
- Invoice finance has much more to offer than traditional bank lending – so it is important to look beyond the cost of credit and consider the overall package.
- The best invoice finance providers will be able to work with and support your business in achieving its goals.
- Check the track record of any potential lender and make sure you hear what existing customers have to say about service levels in particular.
Check out our case studies to understand the benefits of invoice finance and asset based lending.
