Cash Flow

Invoice Finance Guide | Rapid Cash

BY Rapid Cash
16 Mar 2021

For small to medium-sized businesses, maintaining a healthy cash flow is arguably the number one priority. So, any gaps between providing a service or sending out products to your customer, and receiving payment, can be painful.

Invoice finance was invented to try and ease this pain by giving businesses cash in advance, using their unpaid invoices as security. This form of short-term borrowing typically helps businesses manage their working capital, and grant quick access to funds.

In this article, we’ll cover:

  • What is invoice financing?
  • Different types of invoice financing
  • Pros and cons of invoice finance
  • How Rapid Cash has reinvented the invoice financing model

What is invoice financing?

Invoice financing is a business financing method whereby a lender provides a borrower with an advance on their outstanding invoices.

Typically, lenders may offer up to 90% of unpaid invoices up front, giving them the cash that could prevent them from waiting 30, 60, or even 90 days before their invoices are paid.

Once invoices are paid, the lender will then give the business the remaining 10% of cash, minus any admin fees they charge and any interest on the borrowed money. This process describes what you’ll typically find in an invoice finance agreement, but here are some slight variations on the lending method that may be useful to have an awareness of.

Different Types of Invoice Financing

Invoice factoring

Invoice factoring involves a ‘factor’ i.e. a third-party business will take ownership of the outstanding invoice, collecting the debt themselves. They’ll effectively purchase the unpaid invoice outright, giving the factor control over the credit associated with the invoice and enabling them to address customers directly.

Invoice discounting

In invoice discounting, a lender uses your unpaid invoices as security to provide you with a short-term loan. By using this lending method, an SME retains control over the invoice and may have the option to use invoice financing confidentially – meaning the borrower’s client wouldn’t know that an invoice financing service was being used.

Selective invoice discounting

It isn’t always the case that an invoice finance provider will offer you loans based on all of your outstanding invoices. In selective invoice discounting agreements, you may be able to choose which of your unpaid invoices you want to borrow against.

This could give you the flexibility to lend against invoices billed to your most reliable customers. Perhaps that’s your longest-standing clients, or those that have the best track record of making payments on time.

This approach could potentially lead to reduced costs for the borrower, if the lender is confident that they’d be taking less of a risk by lending you funds that are highly likely to be repaid on time.

Spot factoring or single invoice finance

In a spot factoring agreement, a business could choose to sell an individual invoice to a factor – rather than securing finance on an entire suite of invoices. This flexible option may help smaller businesses handle important orders that occur suddenly, and some lenders specialise in spot factoring – which is also sometimes referred to under the umbrella of ‘single invoice finance’.

The pros and cons of invoice finance

Let’s now take a look at how this business financing method stacks up against alternatives.

The benefits

Faster access to cash

Given that the amount of money you can lend in an invoice financing agreement is typically dependent on the size of your invoices, you’re never likely to be borrowing huge sums of money. Nothing that’s comparable to a large business loan, for example.So, borrowing smaller volumes of money may mean that approval processes are quicker than you’d expect with other financing options – which can be a barrier to entry for some.

Flexibility

With more selective invoice financing methods, the flexibility of being able to choose the invoices you lend against can be an attractive plus point for small businesses. The less risk a lender is taking, the more likely they are to offer favourable interest rates on the money loaned.

The shortcomings

It can be expensive

With all business finance agreements, a huge element is the amount of risk a lender is taking by entering an agreement. That risk factor plays a key role in what interest rates the borrower will get access to, and any steps that can be taken to mitigate or reduce risk are generally favoured.

Many businesses that use invoice financing don’t have huge cash flow reserves to fall back on. So, when an invoice defaults and cannot be paid, it may leave the borrower in a precarious situation. To mitigate this, some lenders may offer slightly steeper interest rates than what you’d find with finance agreements that utilise higher-value assets as security – for example in asset financing.

You could be client-dependent

You are still dependent on your clients to pay their invoices on time. Late payments could result in you paying more interest on the money borrowed, which could especially become an issue if you aren’t completely confident in your clients’ ability or tendency to repay money on time.

How Rapid Cash has reinvented the invoice financing model

At Rapid Cash, we have digitised the invoice finance process, negating the manual lift and strenuous effort associated with traditional invoice financing. Our solution involves borrowers connecting their accountancy software (provided by Xero, Free Agent, Kashflow, Quickbooks, Sage, and Sage 50), directly to our digital invoice finance platform. The live connection with our customers’ accounting packages allows us to evaluate their debtor books in real time providing an immediate indicative quote based on the value of outstanding invoices; removes the need to manually input data on the invoices our customers would like to borrow against; as well as remove the requirement for manual monthly reconciliation.

We have created a new pay-as-you-borrow service for limits under £300k, which is tailored to your specific lending needs. If you’re looking to slowly grow your business and think that a little cash flow help could enable this, check our eligibility criteria and learn more about how our product works. We are one of the few invoice finance products that doesn’t have a flat fee or monthly service charges for lower facility limits. However, for limits over £300k, we do charge a 1.5% arrangement fee upon set up followed by an annual renewal fee.

FAQ’s

What is an invoice finance facility?

A ‘facility’ is simply a formal lending programme offered by a reputable institution to help a company that requires working capital to help plug gaps in its cash flow – it’s the official way of describing the invoice financing lending process.

What is an invoice finance broker?

The ‘broker’ within invoice finance is the lender. Typically, a broker will either be an established finance business operating independently, or a p2p lending platform in which the platform lends money within an invoice financing solution using the funds of its’ constituent members.

See what NatWest Rapid Cash could do for you.

To be eligible for Rapid Cash you must be trading for more than 6 months, have an annual turnover of at least £100k and either be a Limited Company or Limited Liability Partnership in England and Wales. Additionally, you need to invoice other businesses and use one of the following digital accounting software: Xero, Quickbooks, Sage 50, Kashflow, Free Agent and Netsuite. Security and Guarantee required. Fees may apply.

Rapid Cash

Rapid Cash offers a modern line of credit unlocked by your unpaid invoices, offering greater flexibility and automation than most traditional finance facilities.