How to use invoice finance to improve company cash flow

Using invoice factoring and invoice discounting to free up working capital

Invoice finance significantly improves company cash flow by releasing the value of unpaid invoices so you don’t have to wait the standard 30 or 60 days to receive payment. It’s a form of alternative finance that offers valuable flexibility and stability for businesses of all sizes.

Two main types of invoice finance exist – factoring and invoice discounting, which although similar in nature, do offer different benefits. So how does invoice funding work to improve your cash flow?

How does invoice finance benefit cash flow?

Invoice finance releases around 90 per cent of eligible unpaid invoices, typically within 24 hours of issue. This removes the uncertainty that’s often associated with being paid as a business, instantly improves company cash flow, and financially stabilises the business.

Furthermore, the facility grows alongside your business. As sales increase, so does working capital availability, which provides greater certainty for budgeting and forecasting and supports sustainable growth.

Is factoring or invoice discounting better for improved cash flow?

Factoring and invoice discounting provide the same benefits in terms of improved cash flow. The key differences are the way in which the facilities are structured and the fact that one is confidential.

Under a factoring arrangement your business sells its unpaid invoices to a factor, which takes over your credit control function and becomes responsible for payment collection. In this case, your customers are aware that you’re funding the business using unpaid invoices.

Invoice discounting is confidential, which may suit some businesses. You remain in control of your sales ledger and credit control function but cash flow is boosted using both types of invoice funding.

Are you eligible for invoice finance?

• Eligibility for invoice finance relies on running a strong sales ledger with few incidences of late payment. Essentially, when estimating risk the financier will consider how likely the invoices are to be paid.
• Businesses using invoice funding also generally sell to other businesses rather than directly to consumers.
• Factoring companies will consider your customers’ creditworthiness rather than that of the business, as they’re responsible for collecting payment under a factoring arrangement.
• A minimum annual turnover requirement of £30,000 and a trading history of six months or more are also typical conditions for acceptance for invoice financing.

How to secure an invoice finance arrangement

• Consider whether your sales ledger is strong and if your customers are creditworthy
• Decide if confidentiality is important to your business
• Would you prefer to collect payments yourself or hand over control of the sales ledger to a factor? You may free up considerable time in not having to chase payments.
• Speak to a reputable commercial finance broker that adopts a whole-of-market approach

For more information on how to use invoice finance to improve company cash flow, please get in touch with UK Business Finance. We are established commercial finance brokers and search the whole of the market for the best deals.