As a business owner, one of your most important obligations is to take care of your finances. Proper financial management techniques will ensure that you make the most of your business at every stage of its growth. You will want to track your budget carefully to make sure that you are generating a steady revenue and have enough to branch out at critical moments. However, while it may seem simple enough on paper, the truth is that sometimes not everything will go as planned. When you find yourself in a difficult financial situation, it is crucial for you to understand what tools you have to work with, and how you can use them to help take the weight off. One of the most versatile and effective options that your business can employ is invoice financing.
What is Invoice Financing?
Invoice finance is when a third party, sometimes referred to as an invoice finance broker, agrees to purchase your unpaid invoices for a certain fee. Invoice finance brokers can operate within their own business, under a bank, or with a larger financial institution. Typically, invoice finance brokers will provide business owners with the same options, though different invoice finance companies will offer different fees. Shopping around and seeing what brokers are available to help you can be a good way to get a better rate on your invoices, without having to worry about being overwhelmed. There are two primary types of invoice finance UK, both of which can offer different advantages to interested clients.
The first type is known as factoring, which is also known as debt factoring. Usually, this involves the invoice broker managing your business’s sales ledger, and then collecting the money that is owed to them through your customers themselves. With this option, however, your customers will know that you are using invoice financing options for your business. When you raise your invoice, the invoice broker will then purchase the debt that is owed from your customer. With this option, a percentage of the cost will become available to you immediately. Usually, the broker will pay you a fee based on a number that can range anywhere between 80% and 90%. They will then collect the full amount from your customer, and make the remaining balance become available for you. You will usually have to pay a discount charge as well, which technically qualifies as interest, and additional fees, which is an amount that depends on what invoice your broker will use.
For example, if you are owed £1,000 by a customer, you could sell that invoice to a broker for a percentage, such as 80%. Your broker will pay you £800, and then collect the full amount from the customer. They will then pay you the remaining £200 when they receive the money. You will then pay them any fees or interest that you may owe.
The second type of invoice financing that business owners can consider is known as invoice discounting. The invoice finance brokers will not manage your sales ledger or collect any of your customer’s debts on your behalf. Instead, what they will do is lend you the money against your invoices, which is usually an agreed upon percentage of the invoice’s total value. You will be paying your broker a fee for this option. As your customers begin to pay off their invoices, the money will then go to the invoice broker. This will reduce the amount you owe, which can allow you to borrow more money on your invoice than from new sales at the agreed upon percentage. With this option, you will still be responsible for collecting your own customers’ debts, but it can also be arranged confidentially, You’ll still be responsible for collecting debts if you use invoice discounting, but it can be arranged confidentially, which will prevent your customers from finding out. No matter what option you choose, SME invoice finance can provide your business with several advantages.
Both of these options can provide your business with a large and immediate boost to your finances. Your business will benefit tremendously from the appearance of those funds, and it can allow you to focus on other parts of running your company. It can allow you to enjoy even more options before you have to pay off the brokers.
With debt factoring, your broker will be looking after your sales ledger, and acting in your interest with your customers. This freed time can help you manage your business better. If you were struggling with an issue that would have otherwise required your total attention, you will now be able to redouble your efforts as the broker handles the transactions.
Customers are Credit Checked
Debt factoring allows the invoice finance brokers to credit check each potential customer. What this means is that you will be far more likely to trade with customers who will be reliable with their payments. It can allow your business to enjoy a steadier stream of profits, which, in turn, can provide you with even more freedom and peace of mind.
This option can also allow you to better negotiate terms with your suppliers. Your brokers will be acting in your best interests, which means they will be contacting the right people to establish transactions that benefit everybody. You will be able to save money on your equipment, and enjoy stronger relations with your customers.
Invoice discounting provides its own unique set of advantages. To begin, it will always be arranged discreetly, which means that your customers will not need to know that you are borrowing against the invoices. This can be a good way to preserve your company’s reputation or image, without alerting your clients.
Stronger Ties with Customers
Because you are still managing your customers’ accounts, you will have stronger relationships with them. All of your invoices will be cleared, and your customers will be able to continue working with your business where you need them. With the right foresight and planning, your business will enjoy a financial boost, one that is ultimately manageable and beneficial in the long term.