Who can use Invoice Finance?
There are a number of options open to any business wishing to use an Invoice Finance unit and this has the overall effect of making it available to most kinds of enterprise.
There are a few basic requirements for any business that wishes to go down the path of Invoice Finance so before going any further you should take a look at aspects to confirm suitability.
Turnover Generally, a business needs to have a turnover of at least £50,000 a year before it would be feasible to use an Invoice Finance unit. The reason for this is straightforward. Lender and Invoice Finance providers take a percentage of their customers’ turnover and this has to reach a certain level before it becomes profitable for them to help.
Credit terms Only businesses which offer credit terms for their customers of between 30 and 90 days are suitable and which usually have a wide number of invoices outstanding. Businesses which deal largely in cash sales tend not to need Factoring or Invoice Discounting as their cash flow, by its very definition, is good. Businesses offering longer credit terms than 90 days mean that Invoice Finance providers would have to wait too long before invoices become payable.
Type of business Only businesses who provide products or services to other businesses are able to benefit from an Invoice Finance unit. Similarly, it is more generally used when customers are UK based, although some providers will work with businesses who have international customers.
The wider the spread of customers that a business has, the more a provider likes it. They are generally wary of lending money to businesses which rely heavily on one customer.
While these are the more practical considerations which govern whether Invoice Finance is suitable for a business, there are other things to think about before entering into a serious commitment.
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Who should use Factoring?
Factoring is generally the better option for smaller or newer businesses who are looking for faster access to cash to help them grow without the need to also take on a heavy burden of debt from a bank or other lender.
One aspect of Factoring which is a key consideration is the fact that the lender will generally take over responsibility for collecting payment from customers. Many businesses have a concern that this will have a detrimental effect on the relationship between themselves and their customers, particularly if the lender has to chase for payment. However, it’s a fear that’s usually unfounded as lender realise that it’s in everyone’s best interests to foster and encourage good relationships.
In fact many businesses come to embrace Factoring far more whole heartedly than they ever anticipated. They find that it lifts the burden of having to chase for payments themselves. Having the lender chase payment can also be beneficial for your relationships with customers as the lender has ‘uncomfortable’ customers with customers over payment of invoices. Allowing you to focus on building a good working relationship with the customer.
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Who should use Invoice Discounting?
Invoice Discounting is more often used by larger, more established companies with bigger turnovers and different financial requirements to SMEs. For example Invoice Discounting has been known to be used to fund MBOs without the need to seek capital elsewhere.
Because the business retains the responsibility for collecting payment from customers they often are unaware that the service is being used. This may be particularly useful for businesses that want to avoid sending the signal that they may be facing a cash flow problem.
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It pays to consult the experts
While this article has aimed to give an overview of what kinds of companies would be suitable to use an Invoice Finance unit, it is highly advisable to discuss whether it would be the right option for you with an expert broker like Touch Financial. As well as offering advice as to the suitability of an Invoice Finance unit we have a comprehensive overview of the market and can provide a quote usually on the same working day.
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Every month Touch Financial help businesses improve their cash flow with invoice finance. Request a quote to find out how much extra cash you could raise.
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