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• 13 Jan

  When To Use Invoice Finance

  As important as understanding the product features is the question of when to use invoice finance.

  This article explores when you should consider using invoice financing and the different circumstances that cause companies to employ these products.

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  Explaining These Products

  For comprehensive explanations of the various products, how they work and the pricing see our Invoice Finance Guide.

  When To Use Invoice Finance

  

  There are two broad durations of usage, temporary (or even one-off) and ongoing.

  Ongoing Product Usage

  Firstly, the most common is ongoing usage. This means that a company uses invoice financing products on an ongoing basis, normally for the majority of its invoices. This maximises the funding available and has the effect of smoothing the company's cash flow on an ongoing basis.

  Temporary Invoice Financing

  The second type of usage is temporary. In these cases, the company uses the product for a short period (it may be a one-off use) or may dip in and out using it intermittently, as and when the need arises. These are often called selective invoice financing facilities.

  Circumstances Where You Might Use These Services

  I have produced a list of the situations where factoring or invoice discounting may help. This list is based on various events that could prompt the need.

  Below I have broken down the circumstances which might lead to its use.

  Circumstances That Prompt The Use Of Invoice Finance

  Managing Cash Flow Gaps

  • Extended Payment Terms: Clients may insist on payment terms of 30, 60, or 90 days, leaving your business with less working capital. This is common in some sectors and could create a credit gap that can be plugged using these products. There are specialist products for many industry sectors such as construction, recruitment, transport and manufacturing.
  • Seasonal Fluctuations: Your business experiences seasonal highs and lows, creating cash flow inconsistencies. These products can help you manage seasonal cash flow problems.
  • Delayed Payments: Customers are late in paying invoices, straining your company's cash reserves. This might be addressed by funding against unpaid invoices or by factoring services to assist with your credit control.
  • Unexpected Expenses: Expenditure that is not expected or exceeds your cash on hand. This could be a big tax bill, legal bills or the need for business changes to comply with legislation.
  • Paying Suppliers: Needing to settle supplier invoices on shorter terms to maintain good relationships or to keep under your credit limits.
  • Covering Payroll: Ensuring your employees are paid on time, even if client payments are delayed. If you are in the recruitment sector payroll finance may be an option.

  Supporting Business Growth

  • High Volume of New Orders: You’ve secured a large contract or a surge in sales but lack the funds to fulfil demand.
  • Scaling Your Business: Expanding your team, buying new equipment, or increasing production capacity.
  • Winning Large Contracts: Taking on a large order or contract, perhaps from corporate clients or government contracts with longer payment cycles.
  • Making An Acquisition: This finance can be used against the target company to raise money or as acquisition finance against your other businesses.

  For Startups and Small Businesses With Limited Funding Options

  • Limited Credit History: Startups and small businesses that don’t qualify for traditional loans or overdrafts can often get access to this type of startup finance.

  Solving Financial Problems

  • CCJs: Receiving court actions such as CCJs can prohibit access to some types of finance but not invoice funding.
  • Turnaround Funding: Needing turnaround finance for a company to rescue it from potential future insolvency.
  • Removal Of Facilities: If your overdraft is removed or you lose some other form of business funding and need a replacement.
  • Failure To Qualify For Other Funding: If you fail to qualify for an overdraft, loan or other forms of business finance.

  To discuss when to use invoice finance and your circumstances, in confidence and without obligation please call FundInvoice on 03330 113622 and we will find the best options for your company.

  By Glenn Blackman