Is Invoice Finance A Good Idea?
Invoice finance can provide valuable working capital to your business. However, that comes at a cost. To establish if it is a good idea it is worth running forecasts with a invoice finance facility and without to establish which scenario generates more profit.
With the additional working capital you should be able to take on more work without worrying about cash flow or overtrading. If you are taking on more work that is profitable and generates more in profit than the invoice finance facility costs then it should be a good idea.
The costs associated with an invoice finance facility typically include two main fees. These are the service fee which is the cost for administering the facility. This other is the discounting fee which is the cost of the funds that you borrow. The can differ dramatically from lender to lender so it is important to get the best deal that is available to your business.
There can also be additional fees such as set up fees, audit fees, renewal fees and others. Not all lenders have the same fees so it can be hard to make direct comparisons. We would recommend looking at total fees over a 12 month period. Remember to look at total costs and not just headline rates.
What are the main criteria for invoice finance?
– you should be selling products or services to other businesses
– you should be raising the invoices on credit terms
– the invoices should be raised in arrears of delivery
You should also consider what security you need to offer as the business owner or director. It is important to understand when you may become liable and for how much.