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Invoice finance: Dispelling the myths

Invoice financing has become an increasingly popular form of providing short-term cash flow for the business-to-business sector. In the current economic climate, some companies take full advantage of the repayment terms offered and it can take months for them to settle what they owe, which in turn leaves cash flow strained and suppliers left unpaid.

Solving the problem traditionally 

Put simply, invoice factoring (or invoice discounting) is a form of releasing cash tied up in outstanding invoices thereby allowing the supplier access to money before the customer has paid. It can be a useful tool for SMEs who rely on a regular inflow of cash to operate, helping ensure that capital is available to pay wages and bills on time, and control over the business is maintained.

Traditionally, factoring and discounting solutions required businesses to hand over their entire debtor book for a fixed contract term, and in the case of factoring the consequence can be a loss of control over invoices and a potential breakdown in client relationships. 

Charging structures are often complex and difficult to forecast with the result that many have been scared away from this form of finance. Newer options have helped to modernise the market and it is now possible to finance invoices individually (known as selective invoice finance or spot factoring) in order to maintain more control over the accounts process.

To help explain how invoice financing can support SMEs, we explore the most common myths:

1. Invoice finance ties up all customer invoices

Traditional invoice finance products often commit a company to hand over their entire debtor book for a fixed term period which is usually at least 12 months. However, a more flexible option is to finance one-off invoices on an “as needed” basis. By choosing individual invoices, cash flow can be better managed and companies do not have to surrender their whole debtor book, removing the requirement to treat all clients, customers or debts in the same way.

2. Invoice finance charges are complex and confusing

Invoice finance can have confusing and varied charging structures. It is important to properly understand the costs before embarking upon this route of facilitating cash flow. Securing funding for selective invoices can provide a more transparent option as fees are fixed in advance and charged only for funds in use.

3. Invoice finance is a lender of last resort!

It is no longer fair to say that companies who use invoice factoring are struggling to make supplier payments on time. High street banks are actively encouraging customers to convert overdrafts to factoring facilities and the current thinking is that many companies use cash flow finance in a positive way to boost working capital and grow the company.

4. It ruins customer relationships

Factoring companies have a reputation for taking a tough line with credit management, which can in turn damage client relationships. Maintaining a positive relationship with clients cannot be underestimated. Yet allowing factoring companies to finance the invoice and manage the collections process is no longer a pre-requisite. By keeping control of the invoice process, companies can still raise cash flow finance, manage the collections themselves, and maintain direct control over client relationships.

5. Invoice financing is difficult to exit

It is true that a traditional invoice financing facility will lock companies in to a 12-18 month contract, which some SMEs may be happy to sign up to. Newer solutions work on an invoice-by-invoice basis, removing the need for long-term agreements, thereby providing a no obligation route without ?lock-ins” or on-going charges.

There are many advantages for SMEs who use invoice finance to maintain working capital, not least to keep a healthy cash balance and healthy supplier relationships. A wide variety of invoice finance providers are available so it is important to seek the advice of an independent specialist invoice finance broker from the National Association of Commercial Finance Brokers, as there is an invoice finance option on the market to suit all businesses.

Malcolm Piper is director ofTandem Invoice Finance.


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