Are there any restrictions to invoice financing?
As with any financing route, there are some restrictions to invoice financing.
Invoice financing is only a viable option for your business if your clients are other businesses, so you will be restricted if you work on a B2C basis.
Some lenders insist that you must finance all your unpaid invoices through them. However, Sonovate can operate on a client-by-client basis without the need for an all-turnover agreement.
Until you offer up a personal guarantee and debenture, many financing facilities won’t provide you with the funding you need. Sonovate doesn’t require any personal guarantees and a debenture is only needed once certain lending thresholds are met.
Invoice financing contracts tend to last for a minimum of 12 months and exiting any earlier can result in hefty penalty fees. With Sonovate, there’s no long-term contracts and you only need to give a 30-day notice to exit.
Many invoice financiers choose to hold reserves until the invoice is paid in full. Sonovate will release up to 100% of the invoice value after the timesheet or Statement of Work (SoW) milestone is approved.
If you opt for invoice factoring, you are outsourcing this responsibility to third parties and it’s important to get to know your funder to ensure they are suitable for your business. I.E. Are they specialised within your industry, and are their team experienced? This can also improve and impact your customer relationships. Although less control of negotiating payment terms, you are handing over this responsibility to the factoring company, and therefore don’t have to look like the bad guy when collecting and chasing payments, Instead you can focus on business. Whereas, with invoice discounting, as collections sit within your business you would be responsible for collection of the funds from the end client.
How can invoice financing help plug the cash flow gap of a business?
Invoice financing helps bridge the cash flow gap by providing up to 100% of the invoice value in as little as 24 hours. Let’s illustrate this with an example.
- Let’s say your invoice finance company has agreed to charge a 1% fee for their factoring services.
- You issue your client an invoice for £10,000 and the factoring company will advance you £9,900 (100% of your invoice). The invoice factoring business has already deducted its 1% fee (£100) and you don’t have to wait any longer to get the cash that you are owed.
- If you were to use a bank, you would typically only receive 80% (£8,000) of the outstanding invoice upfront. You would then get the remaining 20% (minus any bank fees) once your client has paid the invoice, which could take weeks or even months.
- The cash flow gap is the period in which you are waiting to receive the remaining funds.
- High advance invoice finance helps alleviate this burden, especially when 80% of your invoice is directed to the contractor.
Recruitment Invoice Finance
Invoice finance is crucial for the recruitment sector because without a steady stream of cash, agencies aren’t able to operate at their full potential.
Recruitment agencies work with companies of all sizes and with customers from varying industries. Many businesses have payment terms that exceed 45 days, and some larger firms can even take more than 90 days to pay their invoices. This creates a disruptive gap on a recruitment agency’s balance sheet.
In these instances, the clients always have the upper hand. If a recruitment agency doesn’t agree with the payment terms, their clients will simply seek out another agency that is willing to work with them.
Temporary recruitment agencies suffer from severe cash flow problems as they need to pay their worker’s wages multiple times before clients pay their outstanding invoices and provide the cash to do so.
Outside of retained search agreements, payment is almost always paid out on the delivery of a milestone – (timesheet, SoW, placement of a permanent candidate) at a future point according to payment days. This can take a long time, resulting in substantial cash flow gaps of up to 90 days. Unless the recruitment agency has access to huge cash reserves, they won’t have enough liquidity to pay their workers on time without some kind of financing.
Clients who fail to pay on time can then restrict the recruitment agency from paying their workers and derail even the most profitable agencies. The delay in funding, alongside the peaks and troughs of demand experienced by recruitment agencies, inhibits the company from developing any further.
Not only this but why use your own cash reserves to pay for expenses when it can be used to accelerate growth and hire new people? Invoice finance is typically regarded as a defensive manoeuvre, however, it can also be used strategically to keep cash availability high.
Invoice financing can support and provide access to all elements and ingredients that help to increase the value of your business by advancing the invoices that you’re owed ahead of time. It’s a sustainable way to pay your workers, cover your overheads, and grow your company – all at the same time.
International Invoice Finance
If your company works with the import and export of goods or services, you will also benefit from international invoice financing. The international trade industry often deals with long payment terms coupled with high demand.
Invoice financing can help your business fund international trade in two ways.
Firstly, it can help fund any outstanding invoices from overseas that come from a subsidiary of a UK company. For example, if you’re a recruitment agency in the UK with a subsidiary in the United States, invoice financing can help fund national or international invoices from that branch.
Secondly, it can help fund export invoices within the UK. For example, if you’re a recruitment agency based in the UK and you work with international clients, invoice financing can help fund outstanding invoices.