What is invoice finance and why is it a good funding option?

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To find out more about invoice finance and why it can be a good funding option for businesses, Business Leader spoke to Josh Levy – CEO at Ultimate Finance.

What type of businesses typically benefit from invoice finance and how is this funding structured?

The short answer is any business that sells to another business on credit. We believe the post-pandemic recovery phase could empower businesses to embrace manageable business debt in a way they have never done before. This is where non-bank lenders alongside financial brokers and intermediaries play an integral part. Impartial and professional advice is more necessary now than it has ever been, particularly to businesses seeking funding for the first time or looking to establish the right long-term debt financing structure.

Businesses looking for an ongoing working capital requirement should consider invoice finance as a funding option, which uses the sales ledger as an asset to borrow money against. It is suitable for any business, whether they’re a limited company, a sole trader or a partnership. Waiting to be paid is a universal pain point for most businesses – regardless of their size or sector. An invoice finance facility offers a simple way to release the money you are owed in unpaid invoices, and it’s funding that, for most lenders, comes with dedicated relationship support and personal contact.

Businesses that can benefit span across many industries, including manufacturing, construction, recruitment, agriculture, transport, retail, telecommunication, technology, engineering, health food, and many more.

When you apply for an invoice finance facility, the lender will agree a funding limit based on several factors: your current turnover, the credit terms you offer your clients, but also your business requirements. They will also agree a prepayment percentage – up to 95% of the invoice value normally – which gets paid into your account as your invoices are raised. When your customers repay, you get the remaining balance minus the lenders fee. It’s a straightforward and flexible solution that helps keep your business moving.

What are trends you’re seeing in the invoice finance space?

Following a challenging 2020 for the Invoice Finance market, with a significant distortion from, and substitution to, the Government lending schemes, there is a returning demand and need for working capital funding solutions. There is a very clear expectation that invoice finance has a key role to play in helping SMEs restructure COVID-related debt and liabilities, and provide the necessary cashflow to support recovery and growth paths.

Market conditions have forced some lenders to reappraise their invoice finance strategies, which has led to portfolio sales, withdrawals from the market and strategic shifts from both high street banks and independent lenders.

Product innovation has been mixed in recent years, with a growing number of single/selective invoice finance players emerging as an alternative to traditional whole turnover facilities, but there has been an unwind of this trend recently with a number of those lenders gradually moving towards a more traditional product offering.

Digital adoption has accelerated over the last 18 months, with a focus on improving the customer experience and ease of facility use through automated payments and extraction of data feeds from banking and accounting systems. By providing easier and faster access to liquidity, we believe invoice finance can play an important role in supporting businesses on the road to recovery and growth.