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SME Invoice Finance: Is It a Good Idea? | NatWest Rapid Cash

BY Rapid Cash
04 Jun 2021

SME Invoice Finance: Is It a Good Idea?

In the increasingly complex world of business finance, it can be hard to know which financing methods your SME should pursue. In this article, we’re placing a spotlight on invoice financing, and diving into the subtleties of this popular financing method.

If you’re new to invoice financing, check out our complete invoice financing guide to get an understanding of exactly how it works, but if you’re familiar with the basics, stick with us as we help you establish whether it’s a finance option you should be considering.

We’ll provide insights into:

  • Understanding your business’ financial needs.
  • Popular uses of invoice financing solutions.
  • Comparing invoice financing against similar solutions.

So, is the invoice financing model right for you?

Understanding the financial needs of your SME

The basic concept of invoice financing might seem like an attractive option. After all, you could receive money as an advance on your unpaid invoices, giving you spending power right now, which can have a crucial impact on cash flow. That said, here’s a quick overview of how relevant this finance method is based on your business’ objectives:

  • Sustained growth – businesses with this objective are likely to find invoice financing a great fit – it could really help with incrementally increasing your client or customer base.
  • Stabilising cash flow – if you’re in a pinch regarding cash flow and need to ensure you have enough money to pay your employees, then invoice financing could be useful.
  • Making major capital investments – we generally wouldn’t recommend invoice financing as the sole method of financing if, for example, you’re looking to expand your premises.

Identifying which of these broad categories your company falls into is the first step in making an informed decision on whether to pursue invoice financing. Following this, it’s important to flesh out the details surrounding your financial needs.

Using invoice financing for sustained growth

Perhaps the most important question to ask yourself as a business owner (if your objective is sustained growth) is ‘how certain am I that my credit will turn into debit?’

If your revenues are growing consistently, even if that growth isn’t colossal, then you may find that the flexibility offered by an invoice financing solution enables you to seize more business opportunities as they emerge.

An example of this could be that you’re looking to increase your monthly stock order, however the cash owed from your customers hasn’t quite reached the bank yet. Purchasing that stock now could help you fuel a new sales initiative that you may otherwise have missed out on.

One attractive option offered by some invoice finance lenders is the ability to lend against specific invoices, rather than across all invoices simultaneously. This could help you secure finance if you’re confident that you have a strong repeated customer/client base with a track record of making payments on time.

Using invoice financing for a quick cash boost

For businesses looking to use internal financing as a means to bolster cash flow, it may help to pin down:

  • How quickly money is needed.
  • The repayment clauses associated with an invoice finance agreement.
  • The levels of risk you associate with debts owed by your customers.

Some invoice financing agreements come with longer application processes, which may render them inadequate for your immediate cash flow needs. In this circumstance, a short-term cash flow loan could prove a more attractive finance option, and so putting in the groundwork to identify how the bullets above impact your business could speed up your search for finance.

It’s worth noting that if you’re in a financially precarious situation and risk bankruptcy, you could potentially face higher interest rates on money borrowed, given lenders may want to balance against the increased risk they’re facing by lending money to you.

Using invoice finance to purchase large assets

The key reason we believe invoice financing isn’t best suited to major capital investments is simply because it’s a short-term financing method that is not designed for large purchases. A business loan is much more likely to grant you the spending power needed to make large, potentially high-risk investments or purchases that change your business fundamentally.

That said, if you are undergoing such a change, invoice financing could be useful as an auxiliary source of business finance. It could help you stabilise and maintain your cash flow to ensure that your expansion project doesn’t hinder your ability to pay your employees, although taking on multiple lending agreements simultaneously is often a tactic used by medium to large-sized businesses rather than businesses with only one or two finance personnel.

Are there better external financing solutions, though?

Hopefully, this article has helped you establish that you’re looking in roughly the right area within SME finance; and in need of short-term arrangements with low-medium volumes of money borrowed, likely on an ongoing basis.

To help you establish for certain whether invoice financing is the right choice, here are a couple of similar financing methods that sit within the same bracket.

Business overdrafts

Instead of offering you money in advance of an unpaid invoice, business overdrafts serve as a financial safety net. They typically involve setting a fixed overdraft limit, and their affordability may be positively influenced by the amount of security you’re able to provide.

There are downsides to business overdrafts, however. Pricewise, you may find yourself paying overdraft fees even when you aren’t actively overdrawn. What’s more, while you’re in your overdraft, you could be paying daily interest fees on the money you’ve borrowed. This may prove more expensive than your typical invoice financing arrangement.

Factoring arrangements

Factoring or invoice factoring arrangements work in a very similar way to their invoice financing equivalents, except there’s one crucial difference. That’s credit control. With factoring, you outsource control of your credit (money owed) to an external party; a debt collector as such.

This could potentially result in slightly cheaper lending agreements, however any clients you work with may have visibility over the fact that they’re paying into a factor-owned bank account. There could be negative connotations associated with debt collection, hence there’s a chance that clients may be dissuaded from purchasing from you if this were to be the case.

Our own version of an invoice financing solution

While the broad concept of invoice financing is attractive and helpful, there are some elements of the traditional invoice financing solution that didn’t sit too well with the team at Rapid Cash. After all, once a lending agreement has been signed, you may still find yourself renegotiating on a monthly basis to continue borrowing, which many teams may not have the time for.

So, we took matters into our own hands. We developed an algorithm that syncs with your cash flow management software to track and monitor your outstanding invoices. Using automation, it could then offer you short-term loans against specific invoices - calculating interest rates, repayment terms and risk assessments in minutes, while giving you complete choice over which invoices you would like to borrow against. Our solution does all the hard work for you and could unlock cash for your business quickly once you’ve signed up.

If you think this solution could add value to your business, contact us or read more about how Rapid Cash works.

What could Rapid Cash do for you?

To be eligible for Rapid Cash you must be trading for at least 6 months, have an annual turnover of at least £100k and either be a Limited Company or Limited Liability Partnership registered 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, FreeAgent and Netsuite.

Security and guarantee required. Interest on borrowing. Product 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.