This blog was originally published on the Sage business community website, a members-only forum where Sage users can connect and share expertise.
If you’re a business that sells to other businesses, it’s likely that you’ll recognise the need for invoice finance.
B2B sales come with a caveat
When a project or contract is agreed, the supplier will send their new customer an invoice for payment when the services or products have been delivered. So far, so good. But that invoice can often have much longer payment terms, meaning the customer doesn’t need to pay on delivery. Average payment terms range from 30-60 days in the UK.
Inevitably, this process leads to cash flow issues for the supplier, who – don’t forget – stumps up cash for the goods and services that have long since been delivered without seeing a penny for months.
It’s a situation that’s worse for the suppliers of large corporate businesses like the supermarkets or department stores. Many of these corporates have payment terms as long as 120 days- imagine how crippling waiting three months for payment could be to a small business like a farm or a bakery. Not only have they already paid for their goods to be delivered, they’re also having to fund production and delivery of other orders in the meantime. It’s a vicious circle.
So this is where invoice finance comes in to save the day, right? Well, not necessarily- unfortunately the traditional invoice finance providers and banks who offer these services have earned a sullied reputation over the past few years.
At its heart, invoice finance is a service that gives suppliers a big chunk of the funds due to them upfront, without having to wait for their customer to pay them. Factoring, a service whereby banks purchase the entire debtor book from a company and fund a percentage of invoices upfront, has come under scrutiny for locking businesses into long-term contracts with hidden fees. It’s even been linked to insolvency and driving businesses into administration.
But the invoice finance industry is changing. If you haven’t looked at the possibility of funding your invoices recently, you should explore the range of new options available. There are still factoring and invoice discounting products on the market, sometimes offered by the high street banks, and they are slowly but surely waking up to greater flexibility and more transparency.
What’s driving that change? Innovation in the market
Companies like our own are introducing a new model for invoice finance- one that’s based around the needs of the customer, not of the banks. Our online platform connects businesses that want to sell invoices with professional investors who want to lend to them. We don’t ask our customers to provide personal guarantees, and there are no long contracts or hidden fees.
Selling your invoices one-by-one (a solution that’s known as ‘selective’, or ‘spot’, factoring) is a great way to maintain control over your debtor book while still accessing funds that your business needs upfront.
The businesses that use this solution are thriving. They’re able to fund growth- selling big contracts, hiring more staff, and exporting goods. That’s because using an invoice finance facility can ensure a healthy cash flow and allow the management to confidently forecast revenue and profit.
Imagine being able to invoice your client and having access to the majority of that cash the very same day. How could that transform how you do business?