FAQ – The 7 Top Questions about Invoice Finance

Following our previous article on how to use invoice finance as an alternative strategy to raising money for a growing business, we take a look at the top 7 questions that business angels and entrepreneurs ask about invoice finance.

1. What is invoice finance?

Invoice finance is a flexible funding facility which grows alongside the development of a business. When invoices are issued, the invoice finance funder provides an agreed percentage. Once the invoice is paid in full, the remainder will be paid, minus an admin fee.

2. How quickly does the business or startup get paid?

The terms and conditions will of course depend on the specific professional invoice finance provider, but most provide the initial payment within 24 hours of the invoice being paid.

3. How much does the business receive upfront?

This will depend on the specific invoice finance provider that you choice, but in most instances it will usually be around 85%.

4. Are there different forms of invoice finance?

In the main, invoice finance can be broken down into factoring (simply termed invoice finance for the Irish market) and invoice discounting.

If a business chooses a factoring service they will place their sales ledger in the hands of the invoice finance provider and their dedicated credit control department.

Those that choose a service (such as Bibby’s invoice discounting provider service) retain the control of their sales ledger.

There are other specific forms of invoice finance which can be tailored to the needs of an individual business such as export factoring and trade finance. This focus on specific invoices from overseas clients – which may require a dedicated credit control function in the country of the purchaser.

5. Is factoring more expensive?

Factoring costs more because it combines two services, a source of finance based on an asset (the invoice) plus the cost of the credit control function. However, in effect, the credit control has been outsourced from the business and therefore, the business no longer carries this direct cost.

6. Why happens if a customer doesn’t pay in the invoice?

This is an issue that can be suffered by any business, but is something that most providers will cover in their invoice finance agreement with you.

In the first instance, the credit worthiness of your customers will be checked. If they do default on their payments then most invoice finance providers will have a debt recovery team to assist with recovering the funds.

If you are growing very quickly, a dedicated debt recovery team who make timely interventions can greatly assist a young startup in collecting debts quickly and fully.

7. Is invoice finance for businesses that are failing?

No.

Invoice finance is an alternative finance solution as opposed to a bank loan or a business overdraft. It is ideal for start-ups and for SMEs looking to expand their operations and even move into new territories. It is suitable for any business looking to free up their cash flow.

It is true that many existing businesses have turned to invoice finance because the banks have shut up shop or simply don’t want to deal with very new (less than two years of history) businesses. Hence, invoice finance has grown in appeal since the advent of the credit crunch in 2007 / 08.

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