Late payments are causing financial havoc for small businesses, but there is a way they can insulate themselves from the bad habits of clients.
Invoice financing is rarely used by most businesses, even though it provides a host of benefits to the companies that do. At the end of 2018, invoice finance for businesses across the UK reached a total of just over £18 billion, according to figures from the UK Finance Invoice and Asset-Based Lending Update. It sounds a lot. But the number of businesses in the UK using either form of lending remained steady compared to the previous year at just over 40,000.
Given there are around 5.7m small and medium-sized enterprises (SMEs) in the UK, that is a paltry figure – amounting to just 0.7% of SMEs who are using invoice financing to help support their business.
When companies are struggling to make payments to staff and suppliers because their income is compromised by late payers, it seems strange that such a simple solution that would resolve these issues would be ignored.
We believe it is down to a lack of knowledge about what this type of product is, which creates a fear of using it. So, here is an outline of what you need to know about invoice financing:
1. You are selling your outstanding invoice to another company – when you use invoice finance, you are actually selling the invoice to a third party. This means you do not have to pay that money back, so there is also no interest to pay.
2. You will not have to chase for payment – this is perhaps one of the biggest benefits of invoice finance. Once you have sold the invoice to the third-party, you no longer have to chase your client for the money. That job belongs to the company that buys your invoice.
3. The money will be with you very quickly – if you are facing a bill, such as payroll, or a VAT payment, then having this money to hand in a hurry can help smooth out any issues. In some cases, the money will be paid into your account once the invoice finance is agreed within 24 hours.
4. Your clients will not think less of you - while very few businesses use invoice financing currently, it is something that many large companies, who let's face it are generally the latest payers, are very familiar with. So you have no reason to think it will damage your relationship with your client.
5. It will save you a lot of time in admin - spending hours each week chasing invoice payments is inefficient, and means you are not using that time to build your business. Using invoice finance puts the onus to chase on someone else, meaning you have more time to do what you are good at. Many firms are reluctant to take on debt, especially in the early stages, as it means they face repayments that could cripple them at a later stage. But invoice finance is not debt, and you will receive the money straight into your company bank account with any fees are deducted at source.
The one thing to bear in mind when you are choosing your invoice finance partner is how much those fees are, and how they are made up. Often the headline fee you see is much smaller than the fee you end up paying, as there can be hidden charges. So, make sure you get all of the fees upfront so there are no nasty surprises.
At Muse, the fee we tell you is the fee you pay with no hidden costs. So if you are interested in invoice financing, then get in touch with us here.