Do all businesses have equal access to finance?
When it comes to traditional financing approaches, it appears small and medium-sized businesses with relatively modest turnovers do not always get the assistance they need from increasingly cautious lenders. Banks are doubling down on eligibility restrictions and requirements for loan applications, as shown in a survey conducted by the British Business Bank. According to the survey, approximately 100,000 SMEs are denied a collective £4bn of funding yearly. Unfortunately, this means even bank loan applications from viable and well-structured businesses are rejected because banks are continually shrinking the pool of finance allocated to SMEs.
However, with invoice finance coming to the rescue, smaller businesses don’t have to be stranded when they run into cash flow and working capital problems. SMEs can receive advance funding for cash that is due from unpaid invoices which enables them to optimize their operations. Thus, smaller businesses get cash injections that fuel cash flow, working capital and growth without help from high street banks.
Factoring and invoice discounting
Factoring and invoice discounting are invoice financing solutions that offer businesses funds against their unpaid invoices. The foremost difference between the two is that factoring facilities buy invoices from businesses then proceed to take over responsibility for the sales ledger and collection of debts. With an invoice discount facility, businesses draw money against their unpaid invoices, but they still retain administrative control of their sales ledger and the debt collection process.
However, in both cases, businesses can release up to 100% of the total value of their submitted invoices and the level of funding available is based on turnover. Furthermore, businesses can submit individual invoices rather than drawing down credit on their entire ledger. The factor charges them interest, and a small service fee and selective invoice finances help to reduce costs associated with these invoice finance facilities by giving business funds to curb cash flow problems or cover expansion costs on an as-needed basis.
Factoring for smaller businesses
Factoring is a particularly suitable option for growing or struggling businesses and start-ups, although some finance providers require a minimum turnover of £250,000. It conveniently offers whole sales ledger and debt collection services for businesses without efficient credit management and accounting systems in place. This helps business to circumvent issues to do with slow or delayed payments since customers are checked for creditworthiness.
With invoice factoring, the factor has control over the sales ledger and ultimately receives outstanding payments directly from customers. Business owners are relieved of the need to chase after debts which leaves more time to invest in the growth and productivity of their business.
Invoice discounting for established businesses
Invoice discounting offers more confidentiality for larger, well-established businesses that have fully functional accounting and credit management departments. By managing the sales ledger and carrying out collections on their own, the business’ customers will not know about the invoice discount agreement between the provider and the business owner. Typically, these businesses are also required to be business-to-business companies with a £500,000 minimum turnover.
Selective invoice finance
Selective invoice allows businesses to access a higher percentage of advance funds against a single, specific invoice without involving whole-sales-ledger agreements. This is sometimes necessary for businesses that experience periodical fluctuations in their revenue, leading to cash flow alterations. Together with bad debt protection, selective invoice financing boosts cash flow when the need arises and secures businesses from non-payment of invoices.