• Invoice financing is ideal for start-ups and large corporates wanting to access funding
  • There are many types of invoice financing, including factoring, and dozens of providers to choose between
  • Establishing early the pros and cons of invoice financing, will help you make an informed decision, including whether you want to protect your debts with trade credit insurance

What is invoice financing?

Under invoice financing, a company gets paid by a finance firm when an invoice is issued instead of waiting for a customer to pay up, meaning cash is no longer tied up in accounts payable.
Adam Stevens, Credit Insurance Consultant at Allianz Trade UK & Ireland, notes
: “Invoice finance – also called invoice funding – means companies can generate the cash to deploy where they most need it.”

Now you know what invoice financing is, here are five key questions to ask before signing up.

1. Is invoice finance right for my business?

Invoice finance, as its name suggests, only works for companies that issue invoices to other firms. So if your firm does cash business with the public, it isn’t available.

Also, invoice finance doesn’t solve underlying business issues. If your real problem is falling revenues or slim margins, these need fixing before invoice financing will be available at a reasonable cost.

2. How much will invoice finance cost?

A key figure to check when considering invoice funding is the discount margin—equivalent to the interest rate on the advanced funds—which can typically range from 0.5% to 4%. Usually, a service fee is also levied as a percentage of business turnover. Plus, there are setup and legal fees.

There are many providers, and inevitably this means some players don’t have full transparency on fees. Scrutiny is essential.

Also, ask about termination fees. Invoice financing can be a long-term way of helping business cash flow, but if it doesn’t work out for some reason, you need to be able to escape without painful penalties.

Read on to discover 3 more vital questions to ask about invoice finance:

3. Factoring? Or Invoice discounting?

There are two types of invoice financing:

Factoring, where the invoice financing firm advances cash against invoices then does all the work chasing for payments; and invoice discounting, where the invoice financier advances cash against invoices but you retain your accounts payable department and chase for payment of unpaid invoices as usual.

If your turnover is less than £100,000 (about €120,000) you’ll likely have to use factoring. Above that, you likely have a choice.

And it’s a critical distinction. Some firms want to control their whole customer relationship, so they choose invoice discounting (which also has lower fees). Others like the idea of, in effect, outsourcing the collection process. Adam says: “If you’re an infant company, maybe you don’t want to pay someone to do collections.”

4. All your invoices? Or just some?

As the market has matured, new products have become available. One important new option for larger firms is to use an online platform to send only some of their invoices to the finance company for immediate payment while processing and collecting the rest internally.

This flexibility can help reduce costs. For instance, a logistics firm may have a cash crunch in the run-up to Christmas, so it’ll send more and bigger invoices to its invoice financing firm. Then, for the rest of the year, they’ll send fewer invoices to keep down costs.

5. Do I need bad debt protection?

Most invoice finance is “recourse financing.” In other words, if the customer fails to pay after a set period, then the finance company will reverse the cash advance and send the invoice back to you. This unpaid invoice is now your problem.

Many providers will, for a fee, bundle “bad debt protection” but this may be inflexible. So it’s important to know that trade credit insurance (also known as bad debt protection) can be bought separately. At Allianz Trade UK & Ireland, we’re very experienced working with firms using invoice discounting.

Why buy separate bad debt protection?

  • Separate trade credit insurance can be more flexible and tailored to your firm;
  • It can cover all a company’s invoices even if some aren’t discounted, giving more effective control of risk; and
  • Costs will typically be lower for a given level of cover.

Adam says: “We’ve saved businesses a lot of money by them working directly with us.” He also notes how, at Allianz Trade, we can provide companies with superior credit limits and cover them for all their risk, not just the invoices that are discounted.

In addition, there are substantial benefits to working directly with a trade credit insurer, including information exchange on creditworthiness issues—vital when making decisions about export markets.

There’s a lot of innovation in the invoice finance market. Choosing the right provider can be a challenge. Our up-to-date article  Invoice finance: a buyer’s guide has much more information to help you make the right choice.

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