Key issues for IT Contractors / Freelancers – IR35, What are the unique challenges for these clients?
If you own a UK business which regularly invoices other businesses (especially on lengthy payment terms) then you could benefit from Invoice Finance to help manage your cash flow. Many UK businesses struggle with cash flow issues, just because a business is profitable does not make them exempt from the challenges of long payment terms and the stress this can put on even simple procedures such as payroll or paying suppliers.
Invoice Finance works by allowing business owners to obtain advances on their unpaid invoices, usually as a percentage of the total invoice value. This percentage can range up to over 90% depending on the industry, type of facility and lender as well as the businesses’ situation. Depending on the type of facility, businesses can choose to either finance single invoices or their whole sales ledger. Once the Invoice Finance facility is in place, the customer submits their invoice/s to their financier who provides the advance to the business at the agreed rate, often within 24 hours of the invoices being submitted. The final step involves payment collection from the customers, then the final remaining balance is released to the business minus any pre-arranged fees with the lender as per the invoice finance agreement.
Invoice Finance can be broken down into a number of sub-products, each with unique differences which can render them more suited to certain businesses. The three core products are:
The differences between the types of Invoice Finance mainly lie in the responsibility of payment collection and management of the sales ledger as well as the amount of the total sales ledger to be financed, however it is crucial for businesses to understand the unique characteristics each facility can offer over the other and what added benefits can be obtained to ensure they choose the right finance for their needs.
With Invoice Factoring, the financier takes responsibility for the payment collection and credit control of the sales ledger. This means the business doesn’t have to spend time chasing payments and can focus on running day to day operations. Following providing the business with the advance: The factoring company collects from the customers at the previously agreed terms and then forwards the outstanding balance to the business, minus any pre-arranged fees.
Another key characteristic of Invoice Factoring is that it can be extremely flexible, allowing businesses to choose whether to factor their full sales ledger in a rolling facility, or to individually factor invoices and when they need it as part of a “Spot Factoring” agreement. This flexibility enables the finance to grow with the business and provide the security of being in control of your receivables’ effect on your cashflow.
Invoice Discounting is where the business itself retains responsibility for credit control and chasing payments. It is often considered better suited for more established businesses with a higher turnover and will usually finance the complete sales ledger. A key benefit in the business itself retaining the credit control is it presents the option of a Confidential Invoice Discounting facility (CID) – Where the business does not have to disclose their use of an Invoice Finance facility to their customers.
After receiving the advance, the business collects from their debtors as usual and then pays any pre-arranged fees to the lender.
Businesses may choose to not finance their whole sales ledger but instead “select” which invoices or specific debtor/customer accounts to finance. This is referred to as either “Selective Invoice Finance” or “Spot Factoring”, which can have their own definition but are often used interchangeably to describe a facility allowing you flexibility over what part of your sales ledger to finance.
The main benefit of selective or “spot” facilities, is it provides added flexibility and can avoid having to pay fees on customer accounts you don’t need advances for. Instead, you simply use the finance on a case to case basis where you need it. This can be particularly useful to businesses with one or more large clients with large invoices and long payment terms that cause cash-flow issues, whilst their remaining debtor book has more suitable terms or smaller invoices.
Whether a business is eligible for Invoice Finance depends greatly on a wide range of factors – especially depending on industry, size of the business, what type of facility is required and the amount of finance required. Eligibility criteria can differ from lender to lender as well as the types or size of business they are able to cater for and the types of Invoice Finance they offer. Due to this variance in criteria, it is often wise to consult an Invoice Finance broker, who can often can obtain competitive quotes from several lenders at a time and compare the right type of facility for your business.
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As asset-based lending such as Invoice Finance grows, the market becomes more and more diverse in terms of the lenders/providers available and in turn the flexibility of what you can find. Providers range from large high street banks to independent specialists all with their own offerings and criteria. It can be a daunting task to choose between providers, especially knowing which ones best suit each industry and being able to compare the top lenders to find the right facility.
At Touch Financial we have access to a panel of over 30 of the UK’s Leading lenders, we use this panel to ensure our clients obtain the right facility for their business – comparing the top lenders and facilities and matching you with several right-fit options.