SMEs in the UK have struggled with late payments for years and cash tied up in unpaid invoices can put pressure on your business’s ability to operate effectively.
Invoice financing can release funds locked up in late payments, giving a business an instant cash flow injection until the outstanding balance is settled.
Consistent late payments can significantly stunt business growth, especially for SMEs with thinner cash reserves.
What is invoice financing?
Invoice financing works by a lender using unpaid invoices as collateral for funding.
Lenders can advance up to 95 per cent of an invoice’s total value almost immediately, instead of waiting 30 days, 60 days or longer for payment from a customer.
The remaining balance of an invoice’s value can be settled once the customer has paid and lenders will deduct a service charge and discount depending on the value of the loan.
This means SMEs can instantly access capital that would be otherwise trapped, allowing them to offer more payment flexibility to clients.
When is it worth it?
This method of securing working capital is a great fit for firms that experience long waits for payment, either due to contract terms or overdue invoices.
Invoice financing helps keep cash flow healthy to cover running costs, begin new projects and reinvest money into business growth.
However, invoice financing is not a silver bullet. Businesses with narrow margins might not be able to use these services, as the fee structures can sometimes dent profitability.
Likewise, businesses with a small volume of invoices that are high value might face disproportionately high costs for advancing payments.
Also, if a business typically receives quick payment turnaround, a short-term overdraft loan may be more appropriate.
Seeking advice
Whether invoice financing is the right choice for you will depend on a number of factors, so getting a second opinion from a specialist can help you decide.
Our accountants can assess your position and advise which options will work best, helping you overcome the frustration of late payments.