Invoice Finance Explained

New financial products are developing rapidly thanks to the wave of innovation that technology has brought into the financial sector.
A large part of these developments are firms offering alternative finance solutions which are often adopted by small and medium enterprises (SMEs) as they offer flexibility and ease-of-use.

One form of alternative finance enjoyed by SMEs is Invoice Finance. In the following we will explain what invoice finance entails, how you know you need it and why it is especially useful for SMEs.

What exactly is Invoice Finance?

Invoice finance is a financial service offered to improve liquidity and short term cash flow. It allows firms to receive funds against their outstanding invoices so that the cash enters the business before the invoice itself is paid.

How does it work?

1. The SME delivers goods or services to their client and subsequently issues an invoice which will be paid in 30 or more days.
2. The invoice finance firm buys the invoice and advances up to 85% of the invoice face value to the SME in return for the right to collect the amount from the debtor later on.
3. Once the payment terms have passed, the client pays the invoice to the invoice finance firm. The invoice finance firm then advances the remaining 15% of the invoice minus fees and interest to the SME.

Why is Invoice Finance relevant for SMEs?

SMEs often struggle with longer payment terms imposed by their suppliers as they delay other operations. Therefore, it is often useful for them to receive funds earlier through the use of invoice finance. It allows their normal operations to continue without the delay of having to wait for an invoice to be paid 30 or more days after the delivery of goods or services.

How do I know whether Invoice Finance is right for my business?

The two basic questions to answer are:

1. Does my business operate B2B; am I offering goods or services to other businesses?
2. Do my clients pay on terms of 30 or more days?

If you responded to both questions with yes, then you should consider using invoice finance to improve your business’ cash flow.
Young companies in particular struggle with having enough cash available to pay their suppliers on time. In these situations, invoice finance can help to free up cash to pay suppliers earlier.

After access to finance, liquidity and cash flow are the most important issues for SMEs, and many are unaware of the options available to help improve these areas of businesses.
Nowadays, fintech platforms exist that allow quick and easy access to short term finance and it is essential for SMEs to become more aware of the opportunities available to them.