Understanding Invoice Finance – myths and misconceptions

Invoice-financeEver since invoice finance emerged as a serious competitor to the traditional business loan in the 1960s, a number of common misconceptions have followed it. Some of these came from the banks themselves, at other times simply from misunderstandings about the nature of invoice finance. For example, some people lumped invoice finance in with less reputable forms of ‘money lending’ – seeing it as a last resort for a floundering business. Fifty years later these misconceptions still rear their heads occasionally, particularly in a climate in which the financial sector is generally held in fairly low regard. In order to get the best out of invoice finance, it’s important to cut through the myths and come to an understanding of how the industry works.

One myth about invoice finance is that it is a needlessly expensive option. Most traditional overdraft facilities today are secured upon hard assets and require minimal day-to-day administration. Invoice finance – particularly factoring but also invoice discounting, allow you to secure quick capital by using your client invoices as collateral, rather than your property. This requires regular administrative exercise, meaning costs are usually higher than an overdraft. However, instead of putting your property at risk for a lump sum or extended overdraft, you’re getting a real business partnership for your investment. Your finance company should work closely with you to collect your invoices on time, and by taking this responsibility out of your hands, it can free up valuable resources that you can utilise in other areas of your business, more than justifying the initial expenditure in the long run.

Another misconception is that because invoice finance companies usually offer an advance of around 85% on client invoices, they retain the extra 15%. In reality, the remaining balance is paid to the client on collection minus a far smaller service charge – very rarely higher than 1.5%. It’s also worth remembering that bank overdrafts are much more expensive than they once were, while other sources such as venture capitalists can come with a dilution of the business owner’s equity. There’s no such thing as free money, but invoice finance is a long-term solution that works towards a company’s development, rather than a quick-fix with repayment as the only goal after the capital has been released.

Finally, some business owners fear that exploring invoice finance options could involve tying themselves into lengthy contracts. Most reputable invoice finance companies offer easy entry and exit plans, including extended trial periods of up to six months to allow you to determine if it’s the right service for you at minimal risk. Some even offer to negotiate a release from your previous contract if you’re looking to change finance companies.

As with any business venture, it is important to do your research and choose an invoice finance house that is suited to your business and vision for the future. However, if you succeed in this you should find that it has a hugely positive impact on your cash flow and overheads. Some 42,000 companies financing £212bn of sales per year can’t be wrong.

Invoice factoring allows you to release cash for your business utilising invoices as collateral. Hitachi Capital is a reputable and leading provider of invoice finance solutions. Winner of the Factor and Discounter of the Year award at the CreditToday Awards 11.

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