THE PROS & CONS: INVOICE FINANCE
There are two different versions of invoice finance. These facilities are provided by UK Banks and/or specialist invoice finance companies such as Bibby, Close Bros. or Hitachi Finance.
Firstly, invoice discount where money is advanced against the invoices you generate. As long as the invoices are raised against other businesses which are a good risk, you can draw down the majority of the invoice value in advance of the due date.
Secondly, invoice factoring, where you sell the invoice at a discount to an invoice factoring provider who then collects the invoice value directly when it’s due.
Caution! Invoice factoring can interfere with the relationships you have with your customers. Invoice factoring can be expensive when all the costs are taken into consideration – don’t just be attracted by an interest rate.
Furthermore, invoice finance, just like overdrafts, can be difficult to exit from once the company has started using it, therefore it’s important to use these facilities with control and discipline and not become over-reliant on it. Ideally only use invoice finance to pay direct costs and overheads and don’t be tempted to use them for new plant and equipment, vehicles – or dividends!
Facility value increases as sales increase. Therefore ideal for fast growth businesses.
Ideal for businesses where a major asset in their balance sheet is ‘debtors’. Invoice finance facilities effectively allow the business to borrow against that asset.
Can be difficult to exit from, particularly if sales decline for whatever reason.
Costs - there are many costs involved - not just interest rate. It’s very important to be clear about the total costs before entering into these facilities.
Not ideal for low profit margin businesses as the cost can be prohibitive.
Invoice factoring involves 3rd parties collecting your debts - this can create uncertainty amongst your customers and interfere with relationship building.