Small and medium size businesses (SME’s) make up a vast proportion of the UK economy. However, approximately 90% of new SME’s fail within the first 10-years of business, with 21.5% failing in the first year. Cash-flow is one of the most common reasons given for the failure of small and medium enterprises. Invoice finance is a type of commercial finance that can help new start-up businesses to overcome cashflow problems, grow and succeed. Below we look at what invoice finance is, as well as the benefits of using this type of finance for new companies.
What is invoice finance?
Invoice finance is a popular type of commercial finance that allows businesses to get paid for invoices more quickly. Essentially when an invoice is raised it is paid by the finance company, which is subsequently repaid when the invoice is paid. Small and new businesses can be susceptible to slow or late payers, which in turn causes cashflow issues that ultimately cause the business to fail. Invoice finance mitigates this issue, maintaining a steady stream of cashflow; find out more about the importance of cashflow here.
Invoice Finance Process
Relatively quick and easy to organise, invoice finance is usually a more accessible type of finance for start-up businesses than a traditional business loan. Using a commercial finance broker is usually the easiest way to organise invoice finance. A broker has a wide knowledge and experience of the market and can help SMEs to secure the best deal with the right credit company for their requirements. Easy steps to securing invoice finance:
- Contact a commercial finance broker
- Apply for invoice finance
- Provide credit company with invoice details
- Get paid the invoice value (usually up to around 90%)
- Finance is cleared when the invoice is paid
Using a finance broker for the application process will ensure that all the required forms are accurately completed, and any required documentation is submitted. A broker is also likely to have access to special deals and rates that you would not receive by going directly to the finance company.
Types of Invoice Finance
There are two different types of invoice finance available to start-up businesses: invoice factoring and invoice discounting.
Both types of invoice finance involve a credit company paying up to a certain value of the invoice when it is raised, the difference is who deals with the invoice being repaid. The credit company deals with collection of the invoice when you use invoice factoring, making this a completely hassle-free option for new SMEs. When you choose invoice discounting, you retain control of the invoice and repayment yourself, meaning that your client will be unaware of the invoice financing arrangement. Find out more about invoice finance here.
How Invoice Finance Can Support New Businesses
Preventing cashflow issues is the biggest benefit of invoice finance for start-up small and medium size enterprises. Securing a contract with a larger company can appear to a great success for SMEs, but it is often their downfall, as the larger company prioritises bigger invoices, meaning that the small business is struggling for cashflow. Utilising invoice finance helps to maintain cashflow and ensure the smooth running of operations.
Having the option of invoice finance can also help a start-up business to deliver a contract that would otherwise be out of reach. Business growth is often reliant upon having the cashflow to source materials, equipment, or additional staff. Invoice finance can fund these investments, allow the small business to complete the order and subsequently grow the business.
Is Invoice Finance Right For Your Business?
Business finance can be the difference between success or failure for a new SME. Speaking with an expert, such as MC Commercial finance, will help to ensure that you are making the best financial decisions for your business, securing only essential credit, on the best deal to allow your company to grow and thrive. Contact MC Commercial Finance to enquire about whether invoice finance is right for your new business and how we can help to make the process as fast and simple as possible.