Who Needs Invoice Financing ?

How to use invoice financing

Published: 22/01/2021

Invoice financing is a dynamic working capital finance solution, but how do you know if it’s the right fit for your business?

What makes an ideal invoice financing candidate?

High-growth: Invoice financing is the ideal solution for cash-hungry, high-growth businesses. Invoice financing grows in line with business turnover, and this kind of financing can pay for itself very quickly if a business is finding itself in a position where new clients are being turned away because there is no cash to fund growth. Invoice financing is one of the few forms of finance with the flexibility to grow organically as the business itself grows.

Start-up: Start-ups often have limited funding options beyond re-mortgaging the family home or asking friends and family for investment. This is because traditional forms of business finance rely heavily on past performance rather than future prospects. Invoice financing provides new ventures with access to working capital that would otherwise be tied up in receivables for up to 90 days. It is a self-liquidating facility - instead of taking on additional debt, the business receives an advance on money it is already owed by clients. Unlike a bank loan there is generally no need to re-negotiate higher facility limits, as available funding grows in proportion to sales. It is a standalone facility that can sit beside other business borrowings.

No property: Invoice financing is an ideal source of funding for companies with no property or business-owners who don’t want to leverage their house to fund the business. Given that the banks will typically only lend against property, companies with no real estate assets are likely to source financing secured by other assets, such as their invoices.

When to use invoice financing?

Here are five scenarios in which invoice financing is an ideal choice.

1. Rapid business growth

As exciting as an increase in sales is for a small business, it can cause huge cash flow stress. Increased costs such as stock and wages may need to be covered before customer payments are received. Invoice financing is linked to sales, which ensures the finance matches growth without adding any pressure on the business. This can help sustain growth and ensure that businesses are not turning down new opportunities because they can’t fund them.

2. Seasonal ups and downs

A business selling sunscreen products may experience high demand during the lead up to the hot peak seasons and then slow down during the colder months. These seasonal businesses must ensure that cash availability matches demand during peak periods and that cash can be brought forward during the slower times when debtor days might stretch out and cause working capital issues. Invoice financing helps to smooth out these cash flow peaks and troughs.

3. Urgent funding required

Traditional bank financing is very slow and can take months to get approved. If a business is in urgent need of funding and is too busy to spend their valuable time negotiating with a bank, applying to use invoice financing is a great choice. The application process is quick and isn’t slowed down by bank bureaucracy. This makes it the perfect solution for businesses looking for growth support. If a business is turning away growth opportunities because they’ve exceeded existing funding lines, invoice financing can help ensure that funds are available to fill new orders.

4. No trading history

Unfortunately, it doesn’t matter how good the business is, if the trading history is less than 12 months it will not qualify for traditional bank financing. Invoice financing is a good option in this situation. Although invoice financing providers consider trading history as part of their risk assessment, a lack of a long trading history doesn’t preclude the business from approval. So, if a business is young with increasing sales and a great pipeline then invoice financing could be the right option for them.

5. Wages and expenses

Most businesses have significant payroll and expenses due on a fortnightly or monthly basis. If their clients are paying them 30-90 days after the product is delivered or service is complete, it makes it very hard to forecast cashflow and ensure funds are available for their short-term commitments. Invoice financing will ensure that the working capital is available as and when the business needs it.

Grapple works with a range of industries, providing flexible solutions to match business needs. Learn how invoice financing works and contact us if you think it’s the right choice for you.