Small businesses face a squeeze. Not only are more customers paying their invoices late as the economy slows and cash-flow pressures mount, but securing financing support from the banks is also becoming increasingly difficult. The Federation of Small Businesses (FSB) says 61% of smaller firms were hit by late payments during the first quarter of the year and that just 19% viewed the availability of credit as good – an all-time low.
Still, there may be a way to square the circle. Invoice finance products provide a means to borrow against the value of your outstanding invoices, unlocking funding for cash flow and growth. Invoice finance, which is available from a growing number of finance businesses and specialist intermediaries, is increasing in popularity; around a quarter of those businesses that applied for credit in the first quarter of the year were looking for some form of invoice finance solution, says the FSB.
These products come in different flavours, but the principle of invoice finance is that when a business has an outstanding invoice with a customer, it can sell this debt to a finance firm. Rather than having to wait for payment, the business gets almost the full value of the invoice upfront – the lender takes a percentage as a fee – and the debt is repaid once the customer settles their bills.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
There was a time when invoice finance was considered a last resort. Many small businesses worried about customers’ perceptions, particularly when it comes to “factoring” products, where entire sales ledgers are turned over to the lender to manage. They feared their customers would interpret such arrangements as an indication of financial weakness.
However, a growing number of small business finance experts believe invoice finance has several advantages over more traditional lending. For example, it can often prove more cost-effective than bank finance, as well as quicker to arrange. There is also often no need to put up any collateral, since the invoice itself offers the lender security.
Adaptable financing
In addition, invoice finance is more flexible and more responsive to a business’s changing circumstances. Traditional overdrafts and bank loans are set up at a fixed point in time on the basis of the business’s trading to date. By contrast, invoice finance facilities continuously adapt according to the business’s revenues: if the business is billing more as sales increase, it automatically has access to larger invoice finance facilities.
Thus invoice finance could prove valuable in a volatile business environment where businesses need to react with speed and agility to changing market conditions. It provides a constantly evolving source of funding that changes with its current growth rate.
That said, businesses need to do their research. Some invoice finance providers have been criticised for opaque pricing. They may require small businesses to sign up for contracts of a year or more, often with a monthly subscription fee payable on top of borrowing costs, no matter how much is borrowed. However, the market is increasingly competitive, with a number of new digitally enabled firms offering products that tend to be more straightforward and transparent.
Invoice finance won’t suit all businesses, but for those with significant sums tied up in outstanding customer debts, these arrangements can be an effective way to unlock value. For some firms, the key will be to improve cash flow against a tough economic backdrop, while for others the priority may be to free up funding for growth. But either way, it makes sense to look beyond conventional banking solutions for the best financing options.
SEE ALSO:
• Small business owners: don’t duck the need to raise prices
• How to prevent your businesses becoming embroiled in a trademark dispute
• How to help your business cope with rising energy costs
-
What will the unravelling of US-China trade mean for the economy?What will a US-China decoupling mean for the global economy?
-
Scottish Mortgage: why we’re turning to private companies and China for exceptional returnsWhen it comes to delivering growth, Scottish Mortgage will stop at no end in its hunt for exceptional long-term returns - this includes China, unicorn companies and sectors such as space exploration
-
'Rachel Reeves' plan to force pension funds into UK assets won't work'Opinion Hustling pension fund cash into British assets sounds like a good idea. It would be better to make Britain an attractive place to invest, says Matthew Lynn
-
Supersonic travel: How China could 'leapfrog' US and Europe's commercial aviation industryOpinion Innovation in commercial aviation has been stuck for 60 years. A commercial supersonic jet might be back on the market soon, but will China get there first?
-
How British businesses can tackle Trump's tariffsThe majority of British businesses are likely to take a hit from the chaos caused by Trump’s tariffs to reorder global trade. Companies in the firing line face some difficult decisions, says David Prosser
-
Trump wants to colonise Mars – will it happen?Donald Trump wants to plant the US flag on Mars. Could humans really live there?
-
Why are energy bills so expensive in the UK?Electricity bills in the UK are higher than in any comparable rich country. Some blame the net-zero zealotry of the government for that. What is really to blame for high energy bills?
-
Will Putin invade Europe? Why investors know Russia is a paper tigerOpinion Markets are right to ignore talk of Putin invading Europe, says Max King.
-
Why French far-right leader Marine Le Pen has been banned from running for officeMarine Le Pen, presidential candidate and leader of France's right-wing National Rally party, has been barred from standing by the country's judges.
-
Five years on: what did Covid cost us?We’re still counting the costs of the global coronavirus pandemic – and governments’ responses. What did we learn?
