Whenever I’m looking at buying a new product or service I find thinking through the relative strengths and weaknesses very useful. It lets me see all of my thoughts on one piece of paper, and helps me make a more measured decision. So let’s do the very same for you for Invoice Finance.
The following information is based on my previous experiences as an invoice finance client, the MD of the largest invoice finance brokerage in the UK and a director of an invoice finance company.
Strengths
Improves cash flow
The main benefit of invoice finance is that it improves your working capital by giving you instant cash when you raise an invoice. This will be at an agreed rate (IP or initial payment), typically 75 to 80% of the invoice value with the balance paid less fees when the invoice is paid by your customer.
Flexibility – moves with your business
Invoice finance is flexible in that it grows and shrinks with your business. The more invoices you have, the more funding you will receive (up to an agreed limit), and when you have a quieter time with less invoices, the funding is reduced. Costs are adjusted accordingly. It is worth noting that this will be subject to a minimum monthly charge.
Takes over the running of your sales ledger – (Factoring only)
With a factoring facility there should be both time and cost savings with the running of your sales ledger, including collections, being taken over by the factoring company. You may be able to redeploy or reduce headcount accordingly. NB this is not the case with Invoice Discounting as the client retains the running of the ledger with these facilities. See previous article for further definitions of these products.
Weaknesses
Costs – can be expensive
Invoice finance can be expensive if you have the wrong agreement. Standard costs are a service charge for the running of the facility, and a discount charge (interest) for the money borrowed. This needs to be negotiated when agreeing the contract and in most cases is value for money. However, where things can become very expensive is when you need additional services, such as quicker payments or additional advances, when your business comes under cash pressure. These additional fees are known as disbursements.
Length of contract
Some providers will ask you to sign up to an agreement for as much as two years. We would recommend that you don’t commit to this length of time and that you try to ensure there is a clause in the agreement allowing you to move, cost free, if you are not happy with the service.
Variable service
Service does vary from provider to provider. Size is not important here as some of the smallest provide the best service. However, the biggest variable is the person or people that are running your account on a daily basis. If you don’t have a good relationship with these people it will make things very difficult. In addition, it is worth noting that this person can be changed at any time and you can go from good to bad in a matter of days.
Transparency
In most cases you are asked to sign a long term multi-page agreement without having the opportunity to sample the product and service you are committing to. We would recommend meeting the people and making sure you fully understand the agreement with all the charges that you are likely to incur fully explained, before committing.
Takes over the running of your sales ledger – (Factoring only)
Whilst there can be both time and cost savings as described above, many clients have found that outsourcing this critical business function to the wrong people can prove to be very costly. For example, the subtle way in which you may have been encouraging key customers to pay on time may become worthless if this is suddenly handled by someone lacking this sensitivity. This can result in slower payment and even loss of customers.
INSIDER TIPS
- Make sure you know all of the cost implications
- Meet the people who will be running your account
- Give yourself a get out clause if you are not happy
If you have any comments on this article or would like to discuss invoice finance and whether it is right for you please contact me at john.thompson@transcapital.co.uk or on 0845 689 8750.
Image by: Mike Curb College of Entertainment and Music Busines