Why SMEs should consider invoice finance

Why SMEs Should Consider Invoice Finance

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Gary Hemming

Author: Gary Hemming CeMAP CeFA CeFA CSP

20+ years experience in invoice finance

If you’re running any type of Small to Medium Enterprise (SME), you know that ‘cash is king’ – i.e. cash flow is the key to success. You may be the most successful business around, but if you haven’t got great cash flow then you won’t grow; it’s as simple as that.

One way for SMEs to keep on top of cash flow is through invoice finance, which effectively frees up capital for you based on your unpaid sales invoices.

If your cash flow is too tight or making your business struggle, then you’re effectively faced with a ‘catch 22’ situation. You need more clients, more sales and more work but you need cash flow to fund that. All it takes is for one client to be late paying, and that shortfall could affect both your growth and even your day-to-day operations.

Without a doubt, invoice finance can help your business. With an improved cash flow, you can grow your business and navigate through tough trading times. Invoice finance is especially useful for SMEs looking to grow – as the working capital made available can directly fund future growth.

How does invoice finance work?

SMEs generate sales invoices, which they then have to spend time chasing for payment against. Occasionally, customers may be late paying invoices (for a variety of reasons), all of which could have a detrimental effect on the daily operations of your business.

Invoice finance can be broken down into two main products, invoice factoring and invoice discounting.

Invoice finance effectively eases that burden by releasing funds based on your submitted sales invoices. You may need those invoices to be paid to allow you pay suppliers, or buy materials, or any other essentials of your business such as expansion and growth. Clearly, any delay in payment will directly impact your business and not just cash flow but time spent chasing payments along with the stress involved.

With invoice finance, the potential stress of funding for your SME is relieved somewhat, as your unpaid sales invoices are reviewed and funds issued by a lender based on your receivables. For example, if you have £100,000 currently in invoices awaiting payment, by using an invoice finance facility you could ‘draw down’ a large portion of those funds from a lender. In turn, the lender will receive the full amount from your client and earn a set percentage commission.

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Invoice finance leaves you to focus on your business

Here’s why SMEs should consider Invoice Finance – it’s not just about cash flow either.

It’s about leaving you, as an already-busy SME owner, time to focus on what you’re good at – running and building a business, not chasing payments. You’ve worked hard to earn your money, so let someone else do the legwork in collecting that money, whilst releasing working capital at the same time.

Invoice finance can give you cash flow, but it can also give you freedom. It can remove the stress of chasing money or concerns over funding the essential growth of your SME.

A workflow for invoice finance

As if the chance of working capital, and a release from the hassle of chasing late payments, is not enough, let’s illustrate exactly how simple the invoice finance process can be for your SME to access.

  1. Your sales invoice is sent as normal to your customer for services/goods.
  2. A copy of the invoice is also sent to the invoice finance lender. Best practice is to do (1) and (2) at the same time, by emailing the customer with the lender CC’d in.
  3. Your lender will then advance you an agreed percentage of each invoice (usually up to 95%).
  4. Chasing the invoice can be done by your SME or the lender.
  5. The customer pays the lender directly, at which time the remaining balance (less any commission) can be paid to you.

So in essence, your invoicing workflow is only amended slightly, yet your cash flow and receipt of funds are greatly improved.

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Read more: Using invoice finance to grow your business.

Which SMEs should consider invoice finance?

If your SME is paid on terms of 30 days or more, you are eligible for invoice finance.

A good example for a suitable SME who should consider invoice finance is a transport company, who may have taken on a lease for a vehicle to serve a particular industry or client. Until the invoice is settled, all upfront costs – purchase/lease, insurance, fuel, maintenance, staff wages etc. will have to be met by the company until the invoice is paid, when the profit will cover the initial costs.

Other industries that may benefit from an Invoice Finance facility are :

  • Freight
  • Construction
  • Security
  • Logistics
  • Manufacturing
  • Engineering
  • Printing
  • Wholesale
  • Recruitment

However, whilst any SME could benefit, the choice of lenders may be reduced depending on each company’s circumstances. Trading history, business setup and credit checks may play a part in a lender’s review whether to issue an invoice finance facility.

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Why SMEs should consider invoice finance

As an SME…

  • You want to make money – which means being paid on time.
  • You want your business to grow – which means having cash flow or working capital.
  • You want to focus on what you’re good at – which means not being distracted by chasing late payments or worrying about cash flow.

An invoice finance facility could allow you to focus on your SME, achieve all of the above three essential aspects of business, minimising stress, time and hassle. That’s exactly why SMEs should consider invoice finance – for growth, for cash flow, and for efficiency. Move your focus from finance and keep both eyes on growing your SME and becoming more productive.

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