According to the Asset Based Finance Association (ABFA), UK receivables finance levels have risen to over £20 billion for the first time ever. This would suggest that invoice finance is one of the most popular funding methods for UK companies – increasingly so amongst SMEs looking to develop and grow as the economic landscape changes.
Whilst it is considered a useful working capital solution in general, it’s seen by many seasonal and growing businesses as a particularly attractive option, especially in sectors such as manufacturing, haulage, and engineering.
Here, Gary Cain, Director of Reach Commercial Finance, gives his take on this funding option – including when accountants should consider it for clients, when not to and the support available should they wish to go ahead.
A quick recap on how invoice finance works
Invoice finance is a flexible revolving facility that changes with the business – freeing up cash to take on new orders and bridging the gap between the point when you make a sale and the time payment is received.
Principally it is secured on the business’s debtor book to provide the working capital rather than relying on the introduction of other monies.
Who is suitable for invoice finance?
For example, it is more challenging to secure a facility for a construction business dealing with long term contracts with onerous terms and conditions than a recruitment business dealing with signed timesheets.
What are the funding options available?
There are a number of options available to businesses using invoice finance. These include effectively outsourcing the sales ledger management function through disclosed invoice factoring or confidential invoice discounting to accelerate cash flow. As with many products, there are a number of variations on a theme.
In simple terms, finance providers will typically purchase the outstanding invoices from the client to facilitate an immediate initial payment for the majority of the invoice value. The balance is then paid to the client on receipt of the debtor payment.
Key considerations for businesses and their advisors
Before securing this type of funding, it is essential to carefully consider the associated pros and cons and be mindful of the jargon involved.
Key considerations are:
- Does the business have the administrative capacity to handle an invoice discounting facility or would it be preferable to employ the services of the finance provider to manage the credit control process?
- What would customers think and feel if the facility was disclosed or should it remain confidential?
For those unsure of the next steps to take
To avoid any pitfalls – and to sense check that any proposed facility, cost and security implications have been fully considered – it is always best to seek the advice and guidance of an expert.
Corporate Strategies work closely with the team at Reach Commercial Finance, an independent financial brokerage with over 25 years’ experience of helping businesses to secure funding. With a UK-wide team working with businesses of all sizes – from start-ups to PLCs with turnovers of over £50million – the company has a proven record of raising finance, supporting fund acquisitions, share disposals and much more.
The success of Reach is founded on providing the most expert and professional industry knowledge and solutions to meet the most specific business finance needs.