Late payment is a significant issue for the UK’s small businesses. Average invoice ageing periods have continued to increase, and many firms are struggling under the weight of unpaid invoices.
This can have a disastrous impact on cashflow – but a technique known as sales finance can provide welcome respite, while also offering an important alternative to all too elusive bank loans.
What is sales finance?
Sales finance is a means by which you can unlock the value of your unpaid invoices. Also sometimes referred to as invoice or receivables finance, this set of techniques allows you to borrow against the value of your sales ledger, eliminating the need to wait for payment to be made by your clients and customers.
What are the forms of sales finance?
There are two main forms of sales finance: invoice discounting and factoring. In a factoring arrangement, you pass your unpaid invoices on to a third party known as a factor. They pay you a lump sum based on the value of those invoices, less an administration fee. It is common for factors to be able to pay as much as 95 per cent of the face value. After this point, the key difference between invoice discounting and factoring becomes clear. In factoring, the factor will then take on responsibility for ensuring that the invoice is paid.
In an invoice discounting arrangement, meanwhile, you will retain control of your ledger, chasing the payment yourself.
How can sales finance help me?
Sales finance is a key means by which you can improve your cashflow. Rather than waiting for your clients to settle their invoices, sales finance provides you with the cash you need within as little as 24 hours. This can be especially beneficial for small businesses to which a single late payment can be disastrous.
It is also important to remember that your choice between invoice discounting and factoring will be informed by your own circumstances. Invoice discounting can be a great option for those who wish to keep control of their debt management processes, and has the added benefit of ensuring that your clients need not know you are using sales finance. Factoring, meanwhile, has the advantage of taking invoice chasing out of your hands, enabling you to concentrate instead on running your business.
Why is sales finance an alternative to the banks?
There are several key ways in which sales finance might provide an effective alternative to bank loans. The first is their availability. Since 2008 conventional bank lending to small businesses has been seriously depressed, and many firms have suffered as a result. Because sales finance allows you to borrow against the value of your sales, the normal lending requirements do not apply.
You will not have to go through the rigmarole of making a bank loan application, nor will you have to tend to your credit file in the way that the banks would require. Just as importantly, there is no requirement for you to provide collateral. This can prove a major advantage for small businesses and those in their startup phase.