Finance · 18 July 2018

How invoice finance helps businesses to manage cash flow

Is maintaining a healthy level of cash flow problematic for your business?
Maintaining a healthy level of cash flow can be problematic for businesses of every kind, particularly in the early days when there are limited cash reserves. However, there are certain industries and sectors that face greater cash flow pressures than others.

Businesses that typically experience natural shortfalls in working capital are those with a significant delay between the provision of a service and payment being received. Construction firms and recruitment agencies are just two examples of businesses that must foot the bill for upfront costs but may not be paid by their clients for 30, 60, 90 or even 120 days.

One way an increasing number of businesses are bridging this cash flow gap is by using invoice finance to release the cash tied up in their invoices. But how does invoice finance work and what specific challenges does it help businesses in different sectors solve?

How does invoice finance work?

There are a number of different products included under the umbrella of invoice finance. Invoice discounting, invoice factoring, spot factoring and selective discounting are variations on a similar theme. All of these finance options are designed to release the cash tied up in unpaid invoices within as little as 24 hours of their issue.

The process is simple:

  • You set up an arrangement with an invoice finance provider
  • Once an agreement is in place, you send copies of invoices issued to your customers to the invoice finance provider
  • The provider pays you between 70 and 95 percent of the value of the invoice almost immediately
  • When the customer pays the invoice 30, 60 or 90 days later, you receive the balance of the invoice minus the finance provider’s fee
This frees up the working capital businesses need to operate effectively. They are able to pay employees, pay suppliers, take on new orders, buy new equipment and take advantage of the business opportunities that come their way.

What industry-specific problems can invoice finance solve?

Businesses that issue invoices to creditworthy commercial customers can use invoice finance to help solve the particular cash flow issues they face. These are some of the industries that commonly use invoice finance?

Construction

Long payment terms are nothing new in the construction industry. The collapse of Carillion shed light on the 120-day payment terms that are common in the industry, with some subcontractors having to wait more than 200 days to be paid by major contractors. Invoice finance frees up cash so construction firms can bid on new work, buy materials and hire employees.

Trucking and logistics?


 
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ABOUT THE EXPERT

Tony Smith is a director at Business Expert, an online funding platform that gives business owners the opportunity to compare the UK's leading invoice finance providers and find the best finance solution for their needs.

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