Sun. Aug 14th, 2022

Top 23 business funding sources (Debt, equity & alternative)

Find the right source of funding for your business venture, whether it’s to get your idea off the ground or to support expansion

Whether you’re a new entrepreneur or an established company looking to grow, at some point you’re likely going to need to obtain some form of funding for your business.

Fortunately, there’s a vast array of options when it comes to raising capital, from debt, to equity and beyond. This guide will take you through all the major sources of funding available to businesses in three key sections:

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Debt finance

Debt financing is a way of raising capital through borrowing funds. It’s referred to as debt finance, as the borrower must pay back the funds at a later date.

Debt finance can be a good option for businesses seeking funding to support growth its also usually tax-deductible which doesn’t hurt. The main downside is that lenders charge interest, meaning you have to pay back more than was initially invested – depending on the interest rate the sum repaid may be far larger than the initial loan.

This obligation makes it a riskier way of raising capital, this is why early stage businesses don’t opt for debt financing. Below you’ll find the key forms of debt financing available to businesses.

1. Business loans (secured)

Secured business loans are secured against assets owned by a business, such as commercial property, vehicles or machinery. Using assets to secure a loan means that the company director doesn’t have to put themselves on the line by personally guaranteeing the borrowed funds (you might also further look to protect directors against other risks through Directors’ and Officer Liability insurance).

With a secured loan, if you can’t repay the borrowed money, the lender has the right to sell the asset/s in question to get their funds back. Secured business loans are a way of unlocking cash tied up in your business assets, using them as security in return for cash.

If you’re a company with high value physical assets, you’re likely to be readily accepted for a secured business loan. Owing to the reduced risk for the lender, this type of borrowing also tends to be a cheaper form of lending versus other options.

It’s important to remember though that secured loans mean your assets are at risk if you fail to repay or miss payments. If you come into financial difficulty, the lender can usually seize and auction your assets. If your asset is your warehouse, essential to the business’ daily operations, that could mean the end of your company.

2. Unsecured business loans

An unsecured business loan does not involve any security or collateral. Instead, lenders judge whether or not to lend based on your company’s ability to repay the loan. They do however often ask for a personal guarantee from a company director to repay the loan if the company defaults (this is also common with overdrafts). Typically, applying for an unsecured business loan involves a deep check into your credit history, income, savings and employment.

Unsecured business loan have the advantage that you don’t have to put up anything as collateral, which means it is open to businesses without physical assets. There are also typically no restrictions on how you spend the borrowed money.

However, interest rates tend to be significantly higher on unsecured loans, due to the higher risk for the lender.

3. Commercial mortgages

Companies looking to invest in land or property for business purposes, often turn to a commercial mortgage as a source of debt finance. This product is basically a mortgage but instead of an individual the company borrows money secured against the property purchased or owned (it’s not uncommon for businesses to mortgage commercial property later on to free up capital).

A commercial property mortgage tends to be a long-term loan between 10 and 25 years. Commercial mortgage lenders typically lend between 60% to 75% of the value of a property. The loan is repaid monthly as with a standard mortgage charge including interest, unless otherwise agreed (some insurers offer quarterly payment schedules).

There are several key benefits to using a commercial mortgage as a source of business funding. Starting with value, if you’ve made a wise commercial property investment an increase in the value of the property may end up outweighing the mortgage (you are however at risk from a drop in value).

Instead of losing money to rent an office or factory space, by purchasing and mortgaging a commercial property you are building long term equity. You also have the option to sublet or lease unused space with your property to make extra income.

Most commercial mortgage providers will however require a substantial deposit to secure a mortgage, usually between 25% and 40% of the price/value of the property (unless you already own it in which case you can often release 100% of the equity via a commercial mortgage).

Companies should also factor in the extra expenses that come with owning property as opposed to renting, such as building repairs, security, insurance costs as well as responsibility for the fixtures and fittings.

4. Asset financing or leasing

Asset financing is a way of quickly accessing a loan that is secured against a high value asset or assets (either to purchase or release equity).

The borrowing company uses its balance sheet assets, such as short-term investments, accounts receivable, machinery or even buildings as collateral to borrow money.

Typical forms of asset finance include equipment leasing, hire purchase, finance leases, operating leases, asset refinance and invoice finance (detailed later on as it differs to traditional asset finance in function and process).

Companies mostly use this form of finance to acquire high value equipment. Typically, this process works via the asset finance provider buying a capital asset that the company needs, with the company agreeing to paying for it in instalments with interest (similar to secured loan).

It’s also common for companies to release cash from existing equipment by selling it to a finance provider and leasing it back from them instead, known as asset refinance.

Asset finance is a preferable form of financing for many businesses and lenders, as it is based on the assets themselves which provide security for both parties. It’s often more flexible and cost-effective than getting a commercial bank loan to purchase equipment and tends to be a quick way for companies to access the capital, resources or equipment they need.

However, it is important to note that it’s a more expensive way of buying an asset than purchasing it outright. On top of that, if you default on a repayment, you could lose the ownership of the asset.

5. P2P lending

Peer to peer lending allows businesses to borrow money through online platforms which match lenders with borrowers. Peer-to-peer lending companies tend to offer their services more cheaply than traditional financial institutions, which enables lenders to earn higher returns and borrowers to borrow funds at lower interest rates. Some P2P websites allow lenders to choose who borrows their money, while on others the money they lend out is divided between lots of borrowers.

P2P lending hugely simplifies the borrowing process. It’s far easier for many businesses to find funding than going down a more traditional route, such as through a bank. Many companies can receive funding within just a few days through a P2P site, or even a few hours. P2P loans are also typically more affordable than other forms of credit or finance.

The biggest downside to P2P lending is the increase in risk. Without restrictions in place and thorough credit checks imposed by banks, many companies borrow more than they can realistically afford, putting them at financial risk. What’s more, many P2P lenders only permit loan-to-value ratios, usually around 65%, which means companies need to find other ways of supplementing their loans.

6. Overdraft financing

Using a bank overdraft is a way for companies to obtain short-term funding. In essence a company agrees on an overdraft limit with the bank, known as the ‘facility’, and the bank charges interest on the amount of the overdraft the company are using (overdrawn). Some banks also charge an overdraft facility fee. Often overdrafts require a director guarantee and assets put up as collateral for larger overdraft facilities.

Most businesses use overdrafts to offset cash flow issues, where the business is healthy but because of outgoings/income coming at different points throughout the month, an overdraft facility is need to pay bills.

Overdraft are typically an easy, quick and flexible way for businesses to borrow money in the short term. Businesses only pay interest when they are overdrawn, and they can review and adjust the overdraft facility limit with the bank.

However, overdraft interest rates are typically higher than business loan interest rates, so it may be worth considering other forms of finance for anything other than balancing cash flow. Most business banks also charge an overdraft fee to keep the facility in place, even if you aren’t using it. Finally, the bank could rescind your overdraft at any time.

7. Business credit cards

Commonly used as an alternative to an overdraft, a business credit card allows the owner to pay for items such as supplies or equipment and pay the cost at a later date. Credit card companies will typically charge a standing fee and agreed interest on purchases, some however have an interest free period or 30 or 45 days, which can be extremely attractive.

Using a business credit card responsibly can also go a long way to building your business credit, which can help your company secure a bank loan in the future. Many credit card companies also offer purchasing incentives to businesses such as airline miles, cashback or other perks.

It’s also important to know that most business credit cards require a personal director guarantee, which can have an effect on your personal credit rating, and may mean that you become liable for late credit. They’re also typically expensive, as interest rates are high beyond agreed periods and there are several fees, such as maintenance fees and late payment fees (many businesses and individuals fall into this trap, it’s worth considering setting up automatic payments will pay anything owed on your credit card monthly).

8. Hire purchase

One of the more popular forms of asset financing is hire purchase, this is where a finance company buys an item that you need, such as a piece of equipment and you pay monthly instalments with interest to purchase ownership over the equipment over time. Asset ownership is transferred to your business once all payments have been made. It’s ideal for any company that needs immediate use of expensive equipment to grow that they cannot afford.

It’s advantageous for companies as they don’t need to raise capital for the full amount, meaning they can make essential purchases quicker. Spreading the cost out over time often also allows companies to opt for newer, better equipment than they would otherwise be unable to afford.

The drawbacks are that the items can be repossessed if you default on payments. This reduces the risk for the financer but can mean the end of your business if the asset is essential to ongoing trade. Defaulting on a hire purchase payment will also harm your company’s credit score.

9. Trade credit

Trade credit can facilitate business to business transactions to go ahead even if the purchasing company doesn’t have enough working capital available for the trade, these type of facilities are often protected by trade credit insurance.

With a trade credit agreement, business customers can buy goods or services from their supplier and pay for them later on (typically 30, 60 or 90 days). Trade credit is particularly useful for smaller businesses or companies who struggle to reconcile the timings of their cash in and cash out and need to purchase stock to grow (it’s also worth exploring stock insurance to protect your assets/debt obligation).

However, trade credit is notoriously risky and many suppliers will not offer it. While it can be invaluable in driving short-term growth, allowing companies to purchase goods and services they need to grow before they have the cash to hand, puts the supplier at serious risk if something we’re to go wrong.

That said, there are some attractive benefits to using trade credit. It makes business-to-business transactions far easier, allowing the business to align their payments with their outgoings and access resources they need when they need them. It also promotes growth for both parties and is far easier to obtain than traditional forms of funding such as a bank loan, as your dealing with a trusted supplier. The flexibility of trade credit can also go a long way to establishing positive, loyal relationships with clients.

10. Invoice finance

Invoice finance involves companies selling their individual unpaid invoices or entire accounts receivable, to a third party for a percentage of their value, usually around 80-95%. This method of finance means that, for a fee, businesses can unlock cash tied up in unpaid invoices, accessing the funds before the customers pay.

It’s a type of business funding often used by companies that work in trades where customers have extended payment terms of 30, 60 or even 90 days. When the customers pay, the lender receives their money, and the business gets its remaining 5-20% of the invoice, minus the fee.

There are two main types of this type of finance being invoice factoring and invoice discounting. They work broadly the same way, except that with invoice factoring, it is the finance company that deals with collecting the debt from the customers.

With invoice discounting, you retain control of your customer accounts, and it’s down to you to chase late payments. For companies that only need help to bridge their cash flow gaps due to one or two customers, its preferential to opt for selective invoice discounting, rather than commit to a contract for their entire sales ledger.

The main advantage of invoice finance is that it steadies your cash flow. Getting a large portion of your invoices paid straight away boosts your working capital, allowing you to purchase more materials, accept more jobs and grow your business without having to wait. It can also be confidential if you choose, which protects your customer relations, as they won’t know that you’re using invoice finance.

Invoice finance does come with some disadvantages. The main one is the price, as invoice finance remains one of the more expensive ways to finance a company. It can also have a negative impact on a company’s reputation, as customers tend to perceive companies that factor their sales ledger as less stable and potentially high-risk suppliers.

11. Merchant cash advances

Hailed as one of the most innovative forms of business finance, merchant cash advances is one of the newer funding options out there. It works by using your business’ card terminal transactions to secure lending, the amount borrowed is then automatically paid back at an agreed rate plus interest on each future transaction. It is ideal for companies that process a substantial amount of card transactions every month.

It’s become a quick and efficient funding solution for many small and mid-sized enterprises, particularly in the retail and leisure industries. One of the principal advantages of this sort of finance is that it’s both flexible and scalable. Repayments tend to represent a percentage of the company’s revenue, meaning they’ll go up and down proportionally with the business’ fluctuating income. It’s also easy to repay the money. The lender communicates directly with the card terminal provider, meaning that the amount they take for repayments never appears in your business bank account. The payment is taken automatically, so the business owner need not worry about making the repayments.

However, like any source of business finance, it’s not without its downsides. First off, you can only borrow funds in line with how much your business makes. The general rule of thumb is that you can receive a merchant cash advance equivalent to what your business accepts in an average month, which makes it impractical for borrowing substantial funds in comparison to a business’s annual revenue.

It’s also only really useful for companies who take the majority of their payments via the card terminal, rather than those who also accept cash or bank transfers. Many lenders only work with specific terminal providers, too, which can limit your options.

12. Start-up loans

Launching a business can be hugely expensive. You’ll need to pay for equipment, marketing, payroll, rent, as well as a mountain of other expenses. One way for fledgling businesses to secure a substantial initial investment is through a start-up loan, a government-backed personal loan available to entrepreneurs looking to start a business in the UK. Many private companies offer a similar loan, too.

Start-up loans are unsecured, meaning you don’t need to put up any collateral. Successful applicants to the government programme will also benefit from 12 months of free mentoring in addition to finance. Each applicant can apply for up to £25,000 (maximum £10,000 on the first loan).

The loans can be a massive help for start-ups looking to get their hands on enough capital to get their venture off the ground but who lack track record most lenders would require. However, there are some things to consider. The loan must be paid back within one to five years, and you are personally liable for repaying the loan even if your business direction changes.

There are also several restrictions about what you can and can’t use the loan for, with exclusions such as training qualifications, education programmes and debt repayment.

Equity funding

Equity funding is where businesses raise funds by selling ownership shares to an investor/s in exchange for capital. The principal difference between debt finance and equity funding is that entrepreneurs using equity funding are not required to pay the funds back. Below you’ll find a breakdown of the most common forms of equity funding.

13. Venture capital

Venture capital investors are professional investors who manage and invest funds for wealthy individuals’ investment banks or other financial institutions. Venture capital investment is classed as high risk private equity investment and VC funds make up about 10% of all private equity funds.

Venture capitalists are looking to invest in high growth potential companies who are typically technology based, popular examples of VC backed companies include Uber, Deliveroo and SimilarWeb. The VC model aims for every 1 in 10 investments to succeed and make such a return that it dwarfs the loss from other failed investments, the average VC operates on a 2:20 rule, meaning they take a 2% management fee each year on the total fund capital and 20% of the upside if a company is able to sold.

Venture capital can be a fantastic way to grow a company fast, with venture investments raning from £500K to £100 million in some cases. Venture capitalists also tend to have vast amounts of expertise that can help accelerate a company, they can offer contacts to support your business.

While there are multiple benefits, finding a venture capitalist investor can be long process. For those who successfully raise venture capital, it normally takes 3-9 months to raise and close a VC round. Bear in mind that the majority of businesses will fail to raise VC funding and VC’s will typically seek additional control via draconian investment contracts and by taking board seats as part of any deal.

14. Angel investor

Business angels (angel investors) are wealthy individuals who use their own funds to invest in the companies they see growth potential in. Angel investment tends to range from £30K up £250K, it is often the first source of investment funding a start-up will secure before moving onto a venture capital round. Aside from the investment capital provided, business angels can also bring invaluable industry knowledge, expertise and contacts, which can help you grow your business in its early stages.

Perhaps the world’s greatest angel investment to date is Google. What began as a university graduate research project became a multi-billion-pound corporation with the help of a staggering investment of $250,000 by Ram Shriram, an investment which is estimated to be worth around $2.5 billion (around £2 billion) today.

15. Equity crowdfunding

Equity crowdfunding is the process of sourcing small investments from a large number of investors via a platform that facilitates the investment. Crowdfunding has grown in popularity in recent years making it’s easier for high-risk early-stage businesses to gather together the funds they need to get off the ground (and now even more developed companies looking to carry out funding rounds).

Crowdfunding also offers more visibility to businesses looking for investment, enabling them to connect with investors all around the world. This visibility also works as valuable marketing and allows you to measure the public’s reaction to your product or business idea. It’s also an excellent option for those who have previously struggled to secure bank loans.

There are several disadvantages to crowdfunding. First of all, not all projects that apply to crowdfunding platforms are accepted onto the site. Secondly, if you do reach the site but don’t reach your fundraising target, any pledged funding is typically returned to the investors.

16. Angel syndicate

Another way to secure angel investment is through an angel syndicate. Business angels invest together as part of a syndicate (group of angels), which reduces each investor’s risk. Sharing the load also means that investors can maximise their investing capacity, to pool funds with others to invest in even higher-potential early-stage businesses. Angel syndicates can, therefore, help early-stage enterprises to secure a substantial investment.

Acquiring funding through an angel syndicate means you can benefit from higher amounts of capital. Syndicates tend to constitute at least three investors, which also means triple the industry knowledge and triple the guidance for your venture.

17. Private equity

Private equity is a route typically taken by more mature companies looking for significant funds to fuel new growth. A private equity fund invests in firms on behalf of its investors and then looks to sell its stake several years later for a significant profit.

Most private equity deals are between £400 million and £4 billion, making it one of the best options for multimillion-pound corporations looking for cash to drive serious growth. Private equity firms look for a majority stake in the business, which can allow them to take the reins and turn the company into something more profitable. This can be advantageous for both parties and can help entrepreneurs maximise the value of their ventures.

However, this level of control can also be a drawback for many businesses who want to retain autonomy over the business direction. Private equity firms want to make the company as profitable as possible, as quickly as possible, which may clash with the longer-term priorities of a company’s founder, who might place more value in brand reputation and customer relations.

18. Corporate Venture Capital (CVC)

CVC is where large corporations invest funds directly into start-ups in exchange for an equity stake. The larger firm provides management, industry expertise and marketing power to help the smaller business gain a competitive advantage. Corporate venturing aims to set up collaborations which drive growth for both parties and have the potential to lead to an acquisition down the line, they tend to focus on businesses and technological development that aligns with their business.

A significant advantage of CVC compared to other forms of funding, specifically private venture capital, is the strategic side to the investment. Strategic CVC investments aim to exploit any growth potential in the parent company by breaking into a new market. CVC investments are therefore typically made in start-ups launching new technologies.

CVC Capital Partners, one of the largest private equity and investment advisory firms in the world. They manage $79.6 billion (approximately £63.2 billion) of assets, investing in high-growth companies across Europe, Asia and the Americas.

Alternative funding

Alongside these more traditional routes of business funding, more and more innovative ways to raise funding are cropping up for small and large businesses alike.

19. Grants

One of the most attractive ways of raising capital is through a business grant. Grants mean free money to get your business off the ground, with no obligation to pay it back (or matched funding to a certain level). Fortunately, there are an enormous amount of grant schemes open to entrepreneurs and companies in the UK. The government offers a huge number of grant schemes for different types of businesses, of varying amounts. Many charities and corporate also provide grants for projects in certain areas or with specific aims.

While grant schemes are in abundance, there is also, unsurprisingly, a tremendous amount of competition. Awarding bodies tend to look for companies that intend to have a positive impact on society, either by helping people in a community or by boosting the general economy. Other things to consider are that most grants are reserved for companies that intend to have a specific impact on society. Successful applicants will have to justify why they deserve the money, how they fulfil the requirements as well as show exactly how they intend to use the funds.

Another thing to consider is how time-consuming applying for grants can be. Most of the applications are lengthy, and you’ll have to provide a considerable amount of information to justify the purpose of your venture and the direction of your company. It’s worth considering whether the amount of time you pour into applications is worth it if none of them are successful.

20. Competitions

There is a vast range of business competitions open in the UK, which can provide funding, resources, training, mentoring or marketing. Many enterprises, charitable organisations and local government-funded bodies offer competitions to individuals with business ideas or small companies looking to grow.

Similarly, to business grants, these are highly competitive, and in the case of monetary rewards, there may be restrictions on how you spend the money. Again, specific awards come with particular guidelines and entry criteria and are usually only open to companies with a specific aim or in specific fields.

21. Tax reliefs

One option to attract business funding is to use a tax relief scheme, such as the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS). These schemes act as incentives to investors to invest in early-stage businesses by offering them attractive tax benefits if the company and investor comply with specific regulations.

The schemes offer a number of different forms of tax relief, from income tax relief to CGT exemption, as well as loss relief which allows an investor to offset any losses they incur from the investment, which drastically reduces their risk and encourages them to invest.

While the tax relief schemes are effective in encouraging angel investors and venture capitalists, these type of investors come with their pros and cons.

22. Friends & family

One of the most common forms of funding for an early stage business venture is via friends and family, for either an investment or a loan.

There are pros and cons of gathering funds this way. Firstly, it’s far easier and quicker than approaching banks, skipping steps like an arduous application process. As they’re members of your close network, they’re usually more flexible and will charge low interest or none at all. The personal level of trust means you tend to have longer to repay them, too.

That said, there are some significant drawbacks to consider. Money can put a strain on any relationship, and transactions like these can make things complicated between friends or even family. If you lose the money, you may also be putting your loved ones at financial risk.

If you do go for this form of funding, make sure you are crystal clear about your expectations for the loan or investment, how long you need the money, how you intend to repay the funds and what shares or profit the investor will receive. It’s a good idea to draw up a formal written agreement to offer your network some security and to take the pressure off of your relationship by making sure everybody understands the terms of the arrangement.

23. Debenture bonds

Debentures are bonds issued by a company to investors when the company borrows money from them. The debenture serves as a loan, which is repayable at a later date by the borrowing company. The company must pay interest to the creditor during the period of the loan at a fixed rate, which makes it a more stable way of investing in a company than by investing in shares. The critical difference is that debenture holders do not have a share in the company itself.

One of the main advantages for the borrowing company is that debentures tend to provide long-term funds. The fixed interest rate tends to be lower than rates you would pay at a bank or for an unsecured loan. As the bond doesn’t offer the investor a share in the company, the business gets to retain full control and keep all of its profits. A debenture is also secured, which makes it an attractive option for the lender, too.

The main difficulty of this type of borrowing is that the company must pay interest payments throughout the loan period. If the company is struggling, it is still liable to pay its interest. It can also be challenging to find lenders who are willing to invest through a debenture, as many lenders want a stake in the business they’re investing in, as well as voting rights.

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Final thoughts

Getting hold of enough funding can be the make or break between your business venture taking off or expanding to its full potential, it can feel like an enormous task but whittling down your options can make the process more efficient, and maximise your chances of raising funds.

Related topics

Angel investmentAsset financeBusiness credit cardsBusiness grantsInvoice financeVenture capital

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A guide to the Start Up Loans Scheme

Find out how the Start Up Loans Scheme works, whose eligible and how to successfuly apply for a government backed Start Up Loan

Robert Lewis | Updated March 27, 2021 | Published August 5, 2020 

A rocket ship on top of a pile of cash, symbolising how a start up loan can help a business to grow

Early-stage companies are notoriously risky – investors and commercial banks have no evidence that you’ll succeed, making it tricky to secure finance. Fortunately, the government offers several schemes to make it easier for entrepreneurs to secure funds to launch a start up in the UK.

The Start Up loan scheme is one of these. It’s a way for budding entrepreneurs to pitch their business ideas or early stage businesses and secure initial of finance. The scheme comprises two loans, an initial start-up loan for new entrepreneurs and a second loan for those who successfully secure the first.

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This guide runs you through the start up loans scheme, including how it works, how to apply and more in the following sections:

  • What is the start up loans scheme?
  • How does it work?
  • How much funding is available?
  • Am I eligible for a Start Up loan?
  • How do I apply for a Start Up loan?
  • Preparing supporting documents
  • How are applications assessed?
  • Applying for a 2nd Start Up loan
  • Final thoughts & FAQs.

What is the Start Up loans scheme?

In 2012, the government launched their start up loan scheme, pledging £151 million to help entrepreneurs set up businesses in the UK. The scheme’s mission is to provide entrepreneurs with the necessary tools, resources and finance to create thriving businesses in all sectors of the UK economy. The initial target of the scheme when it launched in 2012 was to introduce 30,000 new businesses by 2016, but owing to the success of the programme, it continues today.

How does it work?

The scheme is delivered by a network of ‘Delivery Partners’ across the country, who work in partnership with The Start-Up Loans Company, a subsidiary of the British Business Bank, who administer the scheme.

The loans offered as part of this initiative are government-backed and currently charge a fixed interest rate of 6% per year. The critical thing to note is that the start up loan is not a business loan. Instead, it is an unsecured personal loan, assigned to the individual looking to set up, or who has recently set up, a business.

Like other business loans, the loan must be paid back typically over a period of one to five years. As it is a personal loan, liability to pay back the funds lies with the loan recipient, which means even if your business fails, it’s down to you to pay back your funds.

How much funding is available?

The loan can be any amount between £500 and £25,000 for each applicant (up to £10,000 for the first loan). If there are other business owners or partners in the business, they too can apply for a start up loan, as these are granted on an individual basis. However, there is a maximum limit of £100,000 available per business.

Alongside the finance, successful applicants receive free support, advice and guidance to run their business, which can include up to a year’s worth of one-to-one mentoring to guide them in the venture’s early stages.

Applicants also receive support putting together a business plan for the application process. This is a beneficial step whether the individual secures funding or not, as having a solid business plan is often crucial to securing funding through other routes later down the line.

How can I spend the money?

Successful applicants can put the money towards a wide range of uses. The loan exists to help entrepreneurs start a business or grow an existing business that’s in its early stages. You can, therefore, spend the loan on things like equipment, stock, premises, promotion and marketing, and more. You must be able to describe how you intend to use the loan within your business plan and use your cash flow forecast to back up your claims. You must be able to show how spending the funds in this way will help you start or grow your business.

While there are innumerable ways you can spend the loan, there are a few notable exceptions. You cannot use the loan for debt repayment or to fund training qualifications or other education programmes. You cannot use the loan for investment opportunities either, where these do not form part of continued, sustainable business.

How long do I have to return the loan?

You must repay your loan within one to five years. Within this bracket, you have the option to choose a loan term that suits you, depending on your affordability.

Whatever loan term you decide on, you will have to make monthly repayments to pay back the borrowed funds. The handy Loan Calculator on the Start Up Loans website can show you what you can expect to pay monthly to pay back your loan based on different loan terms.

Am I eligible for a Start Up loan?

The scheme is open to anybody who fulfils the application requirements. To be eligible for a loan, applicants must:

  • be 18 or over
  • live in the UK
  • have the right to work in the UK
  • be able to pass the administrating company’s credit checks
  • be able to show that they can afford to repay the loan
  • have a UK-based business that’s been fully trading for less than 24 months, or plan to start a UK-based firm.

While most business types are eligible for funding through the initiative, there are some exclusions. The scheme cannot support businesses associated with the following:

  • weapons
  • chemical manufacture
  • drugs, pornography or illegal activities
  • banking and money transfer services
  • private investigators that do not hold the appropriate licence
  • gambling or betting activities
  • property investment
  • agents for thirds parties, where a third party earns the majority of the revenue, if you would only earn a commission (note that franchise businesses are eligible to apply).

How do I apply for a Start Up loan?

You can apply via the government website, which will take you directly to the Start Up Loans company’s page, who administer the scheme. There, you will be able to start the applications process. There are no application fees or set-up fees, and you can go through the process entirely online.

Step 1: Registration

Firstly, you are required to register your details by filling out the online registration form. As an applicant, you can either choose a Delivery Partner yourself or let the Start Up Loans company decide on a partner for you, based on who they feel can best support your application.

Once you have been assigned a Delivery Partner, the partner will assign you a Business Adviser, an experienced professional who will review your loan request and help you finalise it before it’s submitted and assessed.

Step 2: Application form

The second step is to complete an application form. Here, you will need to provide details about your business or your idea and provide information on your personal information so that they can ascertain how much money you are applying for and how you plan to use the money.

You will then be asked to consent to a credit check, which they run through a Credit Reference Agency (CRA) to validate your personal information and determine your eligibility, by seeing if you can afford the loan.

Step 3: Supporting documents

The third and final step is to finalise your business documents. You will need to provide a business plan, a cash flow forecast and personal survival budget with your application. Your assigned business adviser will be able to help you put together these documents, and the Start Up Loans website also provides a range of templates you can use to complete these documents.

Step 4: Assessment

Once your full application is submitted along with all the necessary supporting documents, the partner then reviews the documents. It carries out a loan assessment to determine whether your business or business idea is viable and whether you can afford the loan and the repayment terms.

Step 5: Sign and receive the loan

If you are approved for the loan, you will receive a loan agreement to sign. Once you have returned your signed agreement, typically in a matter of days you will receive your credit and can begin the 12-months of business mentoring, if you choose.

Supporting documents for your loan application

As mentioned, you must provide several documents for review with your application, which play a big part in determining whether you are eligible to secure funding. These are your business plan, a cash flow forecast and a personal survival budget.

How to write a business plan

You need a clear and structured business plan to show how your business model works and how you plan to grow it, we won’t go into much detail as you can find a detailed guide to creating a business plan here.

How to draw up a personal survival budget

This document is a critical part of any successful start-up loan application. Government-backed lenders are also responsible lenders, meaning they want to be sure that you can survive financially while meeting these payments.

This is why the personal survival budget is so important when your application is being assessed, it is made up of three main sections.

Money coming in

This section is for you to list all the sources of personal income you have coming in each month. This might include your salary from an employer, benefits payments, returns from investments or your personal savings. Typically, applicants list three to six items in the personal income section. You then add all of these sources of income together to provide your total personal monthly income.

Money going out

This section refers to your personal expenses in an average month, which might include rent or mortgage payments, utility bills, council tax, personal loan repayments, school fees, groceries or childcare. A typical personal expenses section features 10 to 20 items. The sum of all these sources is your total monthly personal expenses.

Total surplus or deficit – the balance

This final section is the difference between your total personal income and your total personal expenses: take the second figure away from the first figure. If the resulting value is negative, your personal expenses exceed your personal income. If this is the case, you should consider how you can bring in new income or cut down on your expenditure. If the figure is positive, you’re earning more than you spend.

Your total surplus or deficit should show you how much you can afford extra per month, and whether it will be feasible for you to pay back your loan in monthly instalments.

How to create a cash flow forecast

Applicants to the Start Up Loan scheme must provide a 12-month cash flow forecast. The Start Up Loans company’s business advisers will assess the sustainability of an applicant’s business venture using this information.

A cash flow forecast is an essential document for businesses to plan their finances. It is an estimation of the money your company expects to bring in and pay out over a given period.

The cash in should include all revenue sources, and the money out should consist of all the business expenses you expect to incur, from supplier payments and tax payments to premises rental and employee wages.

Comparing these two figures gives you an idea of how much you will make or lose on an ongoing basis (typically updated monthly, quarterly or yearly), allowing you to make sensible decisions for your company. Similarly, to the personal survival budget, the cash flow forecast constitutes three primary sections and should enable you to manage your cash flow.

Business revenue

Here you should list all the sources of money coming into the business. This might include product sales, service sales, equity, investments, as well as your Start Up loan. The sum of all of these provides your business’ total income.

Business expenses

This section shows all the expenses your business incurs. Things to include are rent payments, staff wages, council tax, supplier costs, marketing costs, licensing fees, etc. Don’t forget the costs that come around less regularly, such as VAT payments which only come around every quarter. The sum of all of these figures gives your total business expenses.

Net cash flow

This is the balance, which is your total income less your total expenses. If this figure is negative, you are expecting your expenses to be higher than your revenue. If it’s positive, you are anticipating your revenue to exceed your expenses, giving you a profit.

What the SLC expect to see in a cashflow forecast

For a robust application, business advisers recommend the following:

  • Remain realistic. Entrepreneurs are ambitious by nature, but it’s essential to be realistic when you predict your sales. In the beginning, your focus will be on marketing and building a brand, which might mean you aren’t able to make as many sales as you expect to. It’s better to make modest estimates and exceed them than to miss your targets consistently.
  • Remember to bear seasonality in mind. Some companies are particularly affected by quiet and busy periods. This might be the case for an ice cream shop that gets most of its customers in summer. Businesses in highly touristic areas may see a spike in sales around Christmas but a drop in January. Your forecasted sales and expected costs should reflect these fluctuations in business.
  • Factor in the promotional activity you have planned. If you’re launching a huge marketing campaign to promote your business in March which you expect to boost your sales, factor these increased sales into your numbers for the months to follow. Similarly, if there are periods where you cut back on your marketing, acknowledge the impact this may have on sales in this period.
  • Don’t forget to include your salary! Many entrepreneurs fail to remember to factor in their own pay in their estimations. If you aren’t going to be earning from any other sources while you start your business, you are going to have to take out your living costs from your business earnings.
  • Don’t forget to include your Start Up Loan repayments. You will have to make your first monthly repayment shortly after receiving your Start Up Loan if you are successful. Make sure that your forecast reflects these payments.

You can produce these documents through the help of the templates provided on the Start Up Loans company website. These templates use an Excel sheet for you to fill in your anticipated earnings and expenses, and will calculate the totals for each section automatically.

How are applications assessed?

Loan applications are accepted at each business adviser’s discretion, though there are three main areas that they take into consideration. These are how creditworthy you are, whether you can afford to take out the loan and repay it, and whether or not your business is viable.

Creditworthiness

To proceed through the application, you must consent to a credit check. This check dives into your financial history to determine your financial behaviour. That said, poor credit history will not necessarily block your application. The company commits to responsible lending, which is why they have to carry out the credit check, as they don’t want applicants to take out more money than they can afford to repay.

Personal affordability

A start up loan is a personal loan intended for business purposes, rather than a business loan. This means the recipient is liable for its repayment, whatever happens to the business or whatever they decide to do. The loans are non-secured, which means you don’t have to put up any security or collateral to guarantee the loan.

However, you will still have to fully repay the loan, as well as any interest due, over the loan term agreed with the Start Up Loans company. When reviewing your application, the business adviser will consult the personal survival budget that you submitted as part of your application. The survival budget declares your sources of personal income and the expenses you have each month, allowing the business adviser to determine whether or not you can afford the loan.

Business viability

Of course, a principal consideration for the business adviser is whether they consider your venture viable. The company wants to ensure that your business will be successful and generate enough income for you to meet your monthly loan repayments. Your business plan and cash flow forecast is crucial here to demonstrate that your product or service is in demand and to evidence how you intend to meet your goals. Fortunately, the Start Up Loans company can provide extensive support putting together these documents, to maximise your chances of securing a loan.

Applying for a 2nd Start Up loan

The Start Up Loans scheme allows Start Up Loan recipients to apply for a Second Loan. This second loan comprises additional business finance, charged with the same, fixed interest rate per year and a repayment term of one to five years.

Are you eligible for the loan?

To apply for the Second Loan, you must complete a new application process. You must also have already made at least six months of full loan repayments for your start up loan before you apply. On top of this, your total outstanding loan balance must not exceed £25,000 at any time.

Only recipients of the first Start Up loan are eligible to apply for the Second Loan. On top of this, applicants must fulfil the following requirements:

  • your business must have been trading for at least three months, but for no more than two years
  • the additional finance must be for the same company as your first loan
  • the total outstanding Start Up Loans balance must be no more than £25,000 at any one time, per individual
  • the total amount of funds lent to any single business cannot exceed £100,000, including all individual business partners
  • you must have made at least three full repayments on your first Start Up Loan
  • the repayments on your first Start Up loan must be fully up to date when you submit your application for the Second Loan
  • in the last six months, you cannot have had any late or missed repayments on your first Start Up Loan
  • you must not have been on a reduced payment plan or Interest Only period (capital repayment holiday) within the last six months
  • you must still meet all of the Start Up Loan criteria.

Documents required

Before you apply and are assigned a business adviser for your second loan application, you need to prepare a series of documents. These are:

  • a summary of your business
  • a breakdown of how you intend to use the second loan
  • an overview of how the company has performed since you received the first loan
  • an updated personal survival budget.

Application process step by step

As with the first start up loan, a second loan is a personal loan used for business purposes, not a business loan. The application process therefore takes your personal circumstances into account, including things such as your repayment history for your first loan, the trading history of your business as well as your future business plans. There are four application stages to apply for the Second Loan:

Stage 1: Application form

Here you will have to provide your personal and business information, including your bank account details, to enable the loan provider to run a credit check to determine your suitability for a second loan. This application form should take no longer than fifteen minutes to complete. You will receive notification within two working days of whether you are eligible to proceed with your application.

Stage 2: Your key documents

If you are found eligible, you may proceed to stage 2 of the application process. For this stage, you will need to provide a range of documents to give an overview of your personal situation and the progress that your business has made since you accepted your first Start Up loan. These documents include a personal survival budget, six months actual business cash flows, a 12-month cash flow forecast and three months’ consecutive business-related bank statements. You can find templates for all of these documents on the website.

Stage 3: Business adviser review

Once you’ve submitted all the necessary documents, your application moves on to the Delivery Partner that handled your first loan application. They will assign you a business adviser who, as with the first loan, will offer you support and guidance in finalising your application for assessment.

Stage 4: Assessment

To ensure that all applications are handled fairly, your application will be reviewed twice – once by your business adviser, once by another qualified individual.

Once you have gone through the application process, your business adviser will contact you to inform you of their decision. If you’re successful, the loan company will assign you a finance partner who will send through your loan agreement by post for you to sign and return, at which point you will receive your loan funding.

Final thoughts & FAQs

Getting a business off the ground is no mean feat, and one thing you’ll need is significant financial backing. Unfortunately, securing finance tends to be an entrepreneur’s nightmare. You might feel like you’re jumping through hoops, just to get rejected again and again.

This government-backed scheme is an excellent option for entrepreneurs, making it easier for entrepreneurs to access the funding they need to get their venture off the ground. Not only does the scheme offer funding, but the free mentoring offers invaluable support, providing new business people with the help and guidance that they need to make the best success of their venture.

If you’ve got an idea for a business and you’ve been rejected from other forms of funding, you might want to consider applying for the Start Up loan scheme. It could be a fantastic way to secure up to £25,000 in funding to break into your market.

Do I need a business account to apply for a loan?

You do not need a business account to apply for a start up loan through the government-backed scheme. However, some lenders require you to have one to qualify for a loan. Still, it is worth asking, as some providers can be flexible.

Can I apply for a start up loan if I’ve recently purchased a new business?

You are still able to apply for a start up loan if you are purchasing an existing business which wasn’t your idea. This applies even if the company in question has been trading for more than two years under different ownership, so long as you haven’t owned the business for more than 24 months.

To apply for a business you are purchasing, you will need a copy of the company’s financial accounts to go alongside your application. If the company is currently operating at a loss or was previously at a loss, you must address this issue in your business plan and how you intend to rectify it.

Can I repay a start up loan early?

Yes. With the Start Up Loan, there are no early repayment fees. However, if you take out a start up loan from another provider, you may receive an interest penalty based on your remaining loan balance for paying your funds back early. Always check with your lender to see if you can afford to repay your loan early.

Can I get a start up business loan for a home business?

Yes, lenders can offer start up loans to entrepreneurs running their business from home. However, you should check with each lender before you apply, to make sure.

Are there alternative sources of funding to a government backed Startup Loan?

The Start Up Loans Company is not the only place you can find a loan for your start up. Many private companies, banks, and charitable organisations offer start up loans for budding entrepreneurs and fledgling businesses. Before you consider applying for the government-back schemes, you might want to check out the other loans for start ups available on the market.

There are a couple of things to watch out for when you are looking to borrow money for your start up. When you compare the different loan providers, search for lenders that offer the loan amount you need. There’s no point applying if their maximum offering won’t be enough to get you off the ground.

Secondly, compare the rates offered by each lender to get an idea of how much interest you will be paying. Some lenders may provide a longer repayment period, but you might have to pay a higher rate of interest.

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The advantage of going through a government-backed scheme is that they pay a lot of due diligence to work out how much they believe you can afford, to prevent you taking out a loan you will struggle to pay back. Once you’ve whittled down your options, it’s a good idea to opt for a loan with the lowest Annual Percentage Rate (APR) for the amount that you need to borrow.

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What is invoice factoring and how does it work?

Learn about invoice factoring as a source of invoice finance, and how it can help you boost your working capital and grow your business

Heather Richardson | Updated July 27, 2021 | Published April 26, 2020 

Invoice amounts about to be factored written on ledger paper

Invoice factoring is an invoice finance facility designed to support businesses in maintaining a healthy cash flow. For many firms which invoice customers with payment terms, it is often not possible to reconcile their incomings and outgoings to avoid cash flow issues (giving even profitable businesses the feeling of being cash-poor). Without a pot of working capital, companies often find themselves stuck in a tight spot, unable to invest in new projects, hire new staff, or grow.

So how can businesses solve this problem? This where invoice factoring comes in as a type of asset-based lending based on money soon coming in. It relevant for any business that invoices its customers with extended payment terms. Instead of waiting weeks or months to see any cash, this source of finance enables you to access the funds in the form of a loan almost immediately, for a fee. This guide will take you through all you need to know about invoice factoring in the following sections:

Related posts

  • What is invoice factoring?
  • How does it work?
  • Advantages & disadvantages of factoring
  • Is my business eligible for invoice factoring?
  • How much does factoring cost?
  • Choosing an invoice factoring company
  • Case study
  • Final thoughts & FAQs

What is invoice factoring?

Invoice factoring is a form of invoice finance. Factoring is often confused with invoice discounting. Both terms refer to forms of invoice-backed finance, where a company sells their invoices to a third-party, who will provide you with a cash advance typically within a few days, and the remainder once the customer pays the invoice, minus a fee.

The principal defining invoice factoring lies in the control of the sales ledger. With factoring the lender takes control of your sales ledger and collects the payment directly from your customer (with discounting the control of the ledger and customer communications regarding invoices remain with the business).

For finance providers, this type of lending is low risk. The customers owe the money they are lending, meaning it’s highly likely that the financiers will see their finance returned. For businesses, this upfront capital releases the pressure of untimely cash flow, releasing funds tied up in unpaid invoices. Bills can be paid immediately, mitigating damage from late-paying customers. For companies looking to grow, this form of finance can be invaluable as a way to access cash at a convenient time, using it to invest and grow without the fear of a cash flow shortfall.

It can be helpful to think of invoice factoring as a business loan. Your unpaid invoices, or accounts receivable, act as your collateral. This form of borrowing is sometimes known as accounts receivable factoring.

Is invoice factoring confidential?

Invoice factoring is typically disclosed. The central premise of factoring means that the lender has control of the sales ledger and is responsible for chasing payment, which means that in the vast majority of cases, the use of a third-party is public.

However, in rare cases, it is possible to use confidential invoice factoring. The factor still controls the sales ledger but acts as your company’s accounting department under your company name, rather than using its own name. This option is useful for companies who don’t want to put their reputation at risk by informing their customers of third-party involvement, but that would like to outsource the control of the sales ledger.

How does it work?

A business sells its unpaid invoices to an invoice factoring company which pays the value of the invoices in two instalments to the business, minus their fee. The business receives the first instalment very quickly after the finance provider receives the invoice, usually within 24 hours. This instalment is typically 80% of the value of the invoice and will appear as a deposit in the businesses bank account. The business can then use this working capital straight away to pay bills, pay staff, invest in new materials or expand.

The second instalment arrives once the customer has paid the invoice factoring company. This point is key. If you use invoice factoring, rather than your customers paying you, your lender will take over your sales ledger. Your customers will be aware that you are using a third party, and will have to pay into an account controlled by the factoring company. The factoring company will be in charge of credit control procedures, including chasing non-paying customers.

The control afforded to the lender is where invoice factoring differs from other forms of invoice finance. While relinquishing control can remove some of your company’s responsibility and costs, it can have other impacts, which we’ll take a look at later.

Advantages & disadvantages of factoring

There are a number of pros and cons which come with invoice factoring. The following weighs up the positives and negatives of this form of finance to help you decide if it’s the right financing solution for your business.

Advantages

Speed

Invoice factoring is a uniquely efficient way to secure considerable sums of money quickly. Mmost invoice factors will provide you with your advance within 24 hours of an invoice being created. It’s easy to set up, with most providers approving applications within a week.

No need for security

Unlike more traditional forms of lending and borrowing, there’s no need to put up any additional security beyond the invoice being factored (unless otherwise agreed). The financier knows that your customers are obliged to pay their bills, meaning the outstanding invoices serve as collateral themselves.

External debt collection

Invoice factoring is unique in that the lender almost always assumes total responsibility for debt collection. It’s in their hands to chase late-paying customers and deal with demanding clients refusing to pay. This alleviation can free up valuable time and resources in your company, to be directed to other ventures or plans for growth.

Lower risk

Invoice factoring is also typically a lower-risk form of borrowing, both for your business and for the lender. As a business owner, you are safe in the knowledge that the money you owe is coming in in a matter of weeks or months, removing the pressure of taking on a long-standing debt.

For the lender, they can see where their money is coming from, and they have control over chasing the customers and having their money returned. A lower risk for the lender means this form of finance is typically cheaper than other short-term finance options available on the market, such as business overdrafts.

Flexibility

Factoring is also a flexible form of finance. As your sales ledger expands, or even if it contracts, it’s quick and easy to change your factoring facility to match.

Disadvantages

Third-party involvement

Many clients are naturally distrusting of third-party involvement, and with invoice factoring, there’s not usually a way to hide it. Customers are required to pay the lender directly.

Such involvement can damage your customer relationships, which is worth weighing up when it comes to key clients. It’s also a good idea to vet your lender’s collection methods, to see how obtrusive they are when it comes to chasing or communicating in regards to invoices.

Higher fees than discounting

As the factor assumes control of your sales ledger, they’re also taking on more work, which typically translates into increased costs you pay.

Exclusion from other finance – Borrowing in this way can exclude you from other forms of finance. If you’re receiving invoice factoring, you may be ineligible for different types of borrowing, so it’s worth considering whether you can manage without other sources of finance.

Tied in

Invoice factors typically offer long-term contracts. Some contracts may lock you in for 24 months or more, with significant early termination fees. Many contracts oblige you to sell all of your invoices to your factor, even in periods where you aren’t experiencing a cash flow shortage.

Using factoring in times where you may not truly need it means that you could be unnecessarily losing profits, owing to the factor rate, services fees and any additional charges. Invoice factoring can, therefore, be unsuitable for businesses with seasonal fluctuations that are able to manage their cash flow in busier periods.

Is my business eligible for invoice factoring?

More and more factoring companies are appearing, offering this form of finance. It’s often an effective solution for small businesses and startups, as well as more established companies. Your businesses eligibility for invoice factoring will largely depend on:

  • who your customers are
  • how large their invoices are
  • the time frame on their payment terms
  • the industry in which you operate.

These factors enable the lender to figure out is how much risk there is for them in factoring an invoice/s (how likely it is that customers won’t pay their invoices). For this reason, the credibility of the businesses owing is more significant than the credit rating of your own company.

Dealing with credible clients, such as governmental organisations, larger companies or firms with a good credit history, is likely to work in your favour when it comes to securing an invoice factor.

What if my business has poor credit?

Unlike other forms of finance, the risk for the lender comes from your customers rather than from you. So, the real question here is, are your customers creditworthy? If your customers have a good credit rating, this minimises the risk of non-payment.

This model of invoice lending means invoice factoring is available to many companies with poor credit, who may have been refused other types of borrowing in the past. Using invoice factoring can even boost your credit score over a more extended period.

What industries typically use factoring?

Invoice factoring is particularly used by businesses in industries with inherently long payment terms, or for companies that rely on several large customers, where one late payment can throw their entire month’s cash flow off balance.

To give you a practical idea of who uses invoice factoring and why, the following are examples of industries and situations where this type of finance is commonly used.

Printing and publishing

Late payments are inherent to the publishing industry. Getting a book or a magazine to print involves a lengthy chain of events. Each stage is reliant on the previous one, making it a challenging industry to navigate when trying to maintain healthy cash flow. Invoice factoring can remove the financial pressure for publishing businesses, meaning printing firms can take on more clients and grow their business without worrying about short term cash flow problems.

Food service companies

Many food service companies are accustomed to waiting 30 to 60 days for clients to pay their invoices. This delay is particularly problematic for smaller food service companies looking to expand. A lack of working capital prevents such companies growing and can run some companies into serious financial problems. Invoice factoring can provide an advance on slow invoices, allowing companies to pay their food suppliers, staff and safely bid for new contracts.

Law firms

Many professional services offer credit terms to their clients, leading to significant payment gaps of up to 90 days, which is often the case for law firms. For commercial law firms, it’s essential to maintain a good rapport with customers to secure their future business, which means many legal firms are hesitant to harass their clients for speedier payment. Thus, invoice factoring can act as a temporary stop-gap for law firms and removes the pressure of hurrying valuable slow-paying clients (though invoice discounting is likely more suitable in this type of situation, where managing client relationships carefully is key).

Transport industry

Maintaining a transport business is a juggling act. Bills and costs crop up throughout the month; on top of payroll pressures and paying suppliers, there are the added costs of fuel and vehicle maintenance, which can be unpredictable. Invoice factoring can free up cash tied up in unpaid invoices, meaning transport companies can use this cash injection to invest in medium to long term growth strategies.

Aside from the above, other common industries that use invoice factoring include recruitment, manufacturing, wholesale and distribution, trade services and retail. Unlike other forms of invoice finance, it is practical for and popular among small businesses and larger businesses alike.

How much does factoring cost?

There are two main fees involved in invoice factoring: the discount charge, and the service charge. The discount charge works in the same way as interest on a traditional bank loan, applied on the advance you receive from your invoice factor. It’s the fee that the factoring company charges on a weekly or monthly basis, in return for borrowing money. Typically, the discount charge is a percentage of the invoice value, from 0.5-5%.

The service charge covers the running of your factoring facility, including costs for credit management, payment collections and general admin. Service charges are typically 0.75-2.5% of your annual turnover.

Additional fees

How much you pay may seem straightforward, but it’s crucial that you keep an eye out for any additional fees (such as a contract termination fee). The following additional charges you should keep an eye out for as they are typical in factoring contracts:

  • a setup fee, to cover the cost of initiating your factoring facility
  • minimum usage fee – you may receive a charge if you don’t fulfil a specific volume of invoices per month
  • extension fees – if you want to increase your facility, you may incur a charge
  • administration fees – this can cover the cost to the factoring company of auditing your business documents
  • early termination fee – if you want to leave your contract early or if you don’t provide enough notice, you may be liable to pay a termination fee.

It’s a good idea to discuss all charges with potential factoring companies before making a decision, ensuring all fees are explicit and transparent before you sign an agreement.

What factors affect fees?

Factoring companies will offer you fees base on several factors.

Volume and size of invoices

The more invoices you offer a factor, usually the lower rate you’re likely to pay because an increased volume means a more consistent stream of revenue for the factoring company (meaning they can reduce the fee). In addition, owing to the factor’s credit control over your sales ledger, the facility becomes more cost-effective when it has more invoices to control.

On top of this, the larger the invoices, the better. Invoices with a larger value typically reduce the processing fees for the factoring company. Generally speaking, the lower risk your company represents and the higher the volume of invoices you want factoring, the lower the rate you will have to pay.

Industry

Some industries are riskier by nature. Labour-intensive industries such as construction tend to carry a higher risk, as there’s more to go wrong. Project completion dates change regularly, and there are lots of dependent variables at play in each project. This uncertainty translates into varying payment dates, which poses a higher risk for the lender. If the lender perceives your industry to be high-risk, your fees will reflect that.

Your trading history

Invoice factoring companies will want to see your trading history, complete with your financial statements. The less profitable your business, or the lower annual turnover it has, the higher the risk it represents to the lender, typically resulting in higher factoring costs.

Invoice payment terms

The longer your customers have to pay their invoices, the higher your fees. In practical terms the discount charge will be higher, discount charges typically work on a 30-day basis, meaning you may have to double or even triple them for 60- or 90-day payment deadlines.

It’s also important to note the longer the payment terms, the longer your lender has to wait to see their money returned. Lenders have to juggle their own cash flow, too, and the longer the payment period, the bigger this challenge – thus the higher the fee.

Recourse or non-recourse factoring

An invoice factoring agreement with recourse means that lenders are protected if your customers default on their payment. Despite invoice factors assuming control over your sales ledger, a contract with recourse generally means that you remain liable for non-paying customers. A non-recourse agreement means that your lender takes the hit if a customer cannot pay. Non-recourse contracts are more expensive, but the increased cost may be worth it if your invoices are typically large and you want to minimise your risk from non-paying clients.

A non-recourse clause is also known as Bad Debt Protection, where the invoice financier absorbs loss from customers who fail to pay (in effect a form of business insurance). Make sure to carefully check the wording if you agree a non-recourse clause to ensure it covers your business.

Lower rates don’t always equal lower cost

It’s a common misconception that lower rates result in a lower overall cost. Lower discount rates and service fees do not always translate to a lower price per pound. To get an idea of the cost per pound.

For instance, your invoice is worth £1,000. Two separate factors offer you different rates. The first offers you 80% advance at a rate of 3% per 30 days. The second offers you 85% advance at a rate of 3% per 30 days. While the first has a cost of 3.75p per pound, the second offer costs 3.53p per pound, showing that despite having an equal discount rate, the two offers have differing prices.

Choosing an invoice factoring company

Once you’ve decided invoice factoring is the right financing option for your business and have found potential lenders, it time to choose the one for you.

Choosing a lender can be a time-consuming process but its well worth carrying out thorough research to find the provider and invoice factoring facility for your business. When choosing a factor you should consider the following points:

  • Reputation: is the factor credible? What are their clients saying about them? Read online reviews and find them on comparison websites to see how they fare against their competitors
  • Recourse or non-recourse: more on this later. Weigh up the pros and cons of each; while it can massively reduce the pressure to opt for non-recourse factoring, you’ll have to pay for the privilege. Even with non-recourse, check the T&Cs as many factors refuse to assume liability under certain circumstances (further details on recourse below).
  • How well do they know your industry? It’s preferable to opt for a factor which has experience in your industry. Some factoring companies specialise in specific industries, meaning they can offer tailored packages and more effective support.
  • Terms: Read the terms and conditions offered by each provider, making sure you are clear on all charges and additional fees.

If you’re unsure on who to go with, it’s worth exploring using a broker to help you find the best deal. They typically have the necessary industry knowledge to spot a good deal and may be able to find a contract tailored to your specific business needs.

What do I need to apply?

Once you start submitting applications to factoring companies, they will want to review your company to determine their risk level, if they can factor the invoice/s and how much to charge you.

Invoice factoring providers will typically want to consider your credit and transaction history, view your invoices, carry out a credit check and may also ask for additional documents. Make sure that your accounting software and financial records are up to date and that you have all necessary supporting documents ready to provide.

How long does it take to get invoice factoring?

Lenders typically provide advance sums within 24 hours of receiving an invoice. In terms of setting up a factoring facility, some providers will approve your application and begin providing finance within 24 hours. Other companies can take up to two weeks to process and approve an application.

Case study

If your still not sure quite how factoring works in practice, here’s a quick case study. A Sussex based logistics firm is looking to expand. The company is profitable but struggles to reconcile its cash in against cash out to leave any working capital left to implement its strategy for growth. Late payment is part and parcel of the logistics industry and coupled with the pressures of vehicle maintenance, fuel prices and irregular payroll commitments, maintain its cash flow has become a serious problem.

To help, the firm approaches a finance factoring company. The factor investigates the company. The logistics firm is reputable in its local area and has recently won contracts for some large national projects. One of their clients is the local council, and it also has many long-standing customers with good reputations.

The factor considers the company low risk in light of its creditworthy customers and sizeable invoices. The factoring company offers the company a £300,000 factoring facility. Within several months, the business sees exponential growth owing to its boost in purchasing power. The company expects to triple its turnover in the next two years, thanks to its asset-based lending providers facility.

Final thoughts & FAQs

Businesses of all sizes and spanning all industries struggle when their cash flow doesn’t line up. Recent studies suggest that small businesses receive late payment for over 60% of their invoices. A delay in funds can lead to substantial financial problems even for profitable companies. Without the operating liquidity to pay suppliers and staff, business can grind to a halt.

Invoice finance can be a useful way to remedy temporary cash flow shortages by releasing capital tied up in outstanding invoices for companies to use whenever they see fit. This flexibility facilitates investment and growth for profitable, cash-poor businesses. Invoice factoring not only provides quick access to cash but frees up time and resources within your business that would otherwise go towards debt collection and sales ledger management.

Ultimately, invoice factoring can be a fast and effective solution to solve your cash flow issues. As with any finance option, factoring has its own positive and negatives. Weigh up the pros and cons for your business to find out if invoice factoring is the right solution for you.

Is invoice factoring regulated?

Invoice financing and thus factoring isn’t currently regulated in the UK, nor is any asset-based lending. It’s therefore all the more important to practice due diligence when looking for an invoice factoring provider.

The FCA (Financial Conduct Authority) is responsible for regulating thousands of financial service firms in the UK. Although invoice factoring as a service isn’t regulated, it is worth checking whether your lender appears on the FCA for other services it offers. The FCA requires its members to fulfil specific standards and follow certain practice procedures. A company is likely to be more credible if the FCA approves them for other services.

What is reverse factoring?

Reverse factoring, otherwise known as supply chain factoring, is when a finance provider commits to paying a company’s invoices to its suppliers at an accelerated rate, in exchange for a discount. Reverse factoring is a funding solution used by a larger company to help the smaller companies with which it works, such as its suppliers, to finance their accounts receivables.

Reverse factoring differs from invoice factoring as the client isn’t backing their own accounts receivables, but rather those of its suppliers, in exchange for a discount. Although this incurs a cost for them, this fee is minimal if it ensures a smooth supply chain, preventing any loss of revenue from delayed manufacture.

Reverse factoring works by freeing up cash further down the line which facilitates a speedy supply chain, an effective solution for all links in the chain. This is often especially useful for companies at the end of a long supply chain. If one of the links doesn’t have the working capital that it needs to complete a job, the rest of the chain suffers. Reverse factoring provides suppliers with the cash they need to complete a task, eliminating the risk of delayed production, protecting the sales of the larger company later on.

Related posts

Reverse factoring is typically used by large manufacturers and suppliers that sit at the end of a long supply chain. The suppliers benefit from faster access to working capital, and the manufacturer benefits from a timely supply chain, keeping their customers happy and sales flowing.

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What is invoice discounting and how does it work?

Find out about invoice discounting, and how it can help your business maintain a positive cashflow by quickly getting access to revenue tied up in invoices

Heather Richardson | Updated July 27, 2021 | Published April 26, 2020 

A spreadsheet showing monies owed in the form of invoices to a business owner, considering invoice discounting as a solution

Invoice discounting is a financing facility designed to support businesses in maintaining a healthy cash flow. A delay between cash out and cash in can have a considerable knock-on effect on a business’ available working capital, vital for making purchases and investments necessary for growth and development. This is where invoice discounting as a form of invoice finance can help. In essence it is a form of asset-based finance, where businesses sell their accounts receivable, or invoices, to a third party, and the third party provides most of the value of the invoice upfront in the form of a loan.

In other words, you can borrow the money owed to you from clients before they pay up. This form of finance allows you to access cash tied up in unpaid invoices immediately, which minimises the damage of late payment. It is a useful source of funding for businesses who can’t afford to grow or develop when clients are slow to pay their invoices, or for companies that have seasonal fluctuations in cash flow. This guide will take you through the following key sections:

Related posts

  • What is invoice discounting?
  • How does it work?
  • Advantages & disadvantages of invoice discounting
  • Is my business eligible for invoice discounting?
  • How much does discounting cost?
  • Choosing an invoice discounting provider
  • Case study
  • Final thoughts & FAQs

What is invoice discounting?

There are two types of invoice discounting available: standard invoice discounting and selective invoice discounting, sometimes known as selective invoice finance. Both types involve a business selling their unpaid invoices to a third-party invoice finance company. The third-party then provides the business a percentage of the total invoice funds straight away for a fee. This means the business can receive the funds immediately without having to wait for the client to pay on standard 30, 60 or even 90-day payment terms.

It can be helpful to think of invoice discounting as a form of short-term business loan, with your unpaid invoices acting as your security.

How does it work?

You sell your unpaid invoices to a lender at a discount, usually a percentage of the invoice value. The provider pays you an advance equal to a portion of the invoice’s value, typically 80-95%. Once your clients pay up, you will receive the remaining amount of the invoice from the lender in a second, smaller instalment, minus the lender’s fee. In practice, your business completes work or fulfils orders, you send out the invoice/s to your invoice finance lender. Once they receive the invoice, they deposit the agreed portion of each invoice into your bank account.

You then collect payment from your customers, as usual, using your credit control processes. On the customer side of things, nothing changes. Your business then has this money available straight away to pay bills, repay debt or invest in the company’s growth.

As discussed there are two types of invoice discounting. Selective invoice finance is by and large the same as traditional invoice discounting. The difference with selective invoice finance is generally that clients choose which customers they would like to factor into the facility and which of these customers’ invoices, rather than using the service for their whole sales ledger.

This form of invoice finance affords you more freedom over which invoices are included in the agreement, allowing you to retain more control. You can typically release up to 85% of the value of your invoices with this form of finance. In practice the two forms of invoice discounting work as per below.

How does selective invoice finance work?

Selective invoice discounting works as follows:

  • The company assigns an invoice to the discounting company with agreed terms and fees.
  • Once approved, the lender will receive a copy of the invoice, along with any supporting documents.
  • The discounting company advances a percentage of the invoice face value to the business up front, usually 70-90%, minus the agreed charge.
  • Once the invoice is settled, you receive the balance due.

How does selective invoice discounting work?

Selective invoice discounting is designed for businesses struggling with unpredictable cash flow at certain times (or due mainly to one or two key clients). It is an effective and affordable solution for many companies, including:

  • Companies that make business-to-business (B2B) or business-to-government (B2G) transactions
  • Businesses that trade principally with one customer
  • Businesses that need a one-off cash flow injection to invest in something new
  • Companies experiencing a temporary shortfall in working capital.
  • Businesses where key customers have longer payment terms, such as 60- or 90-day deadlines.

Selective discounting is often a better option for established businesses with committed, loyal customers. The risk posed to the finance provider lies with your customers rather than with your business, so many lenders will request evidence that your customers pay consistently, within their deadlines (for this, you must be able to provide a solid track record of customers paying on time).

Most lenders will require one year’s trading history before they consider financing you. With this type of finance, chasing debts is your responsibility, so a lender will want to see that there is a robust debt collections process in place. Lenders prefer financing clients that deal with government agencies or larger, established businesses, who are more credible when it comes to paying invoices.

Which is a better fit for my business?

Invoice-based lending can be a fantastic solution for many businesses. It can be difficult to determine whether invoice discounting or selective invoice discounting is best for you. The primary consideration is whether your company continuously struggles with reconciling outgoings with income, or whether this is only an issue with regards to particular clients or at certain times in the year.

Advantages & disadvantages of invoice discounting

There are countless funding options available for businesses seeking finance of any kind. From business loans and grants to debt finance and asset-based lending, it can be hard to choose a type of funding or finance that’s best for you.

Research all your options carefully and consider seeking the advice of a financial adviser for more bespoke information. To get you started on analysing if invoice discounting is the right finance sources for your business, the below sections runs through the primary advantages and disadvantages of using invoice.

Advantages

Confidentiality

A significant benefit to invoice discounting as a source of finance is that it can be entirely confidential, which is why this form of borrowing is sometimes known as confidential invoice discounting. In other words, your customers will not know that you are using a finance provider, to which they may object. Confidential invoice discounting is favourable as it allows you to retain control over your customer relations and maintain strong client relationships.

With disclosed invoice discounting, on the other hand, your customers will be aware that you are using a third-party finance provider. The invoices will contain a note to explain the fact, and your customers will pay the lender directly.

Regardless of whether you opt for confidential or disclosed invoice finance, it remains your responsibility to communicate with your customers, to chase them for late-payments and deal with any issues. If you’re looking to remove this responsibility, you can consider other methods such as invoice factoring, where the lender assumes this responsibility.

Up to 95% invoice financing

A principal advantage of using invoice discounting is that you can receive more of the invoice value than with other cash flow solutions. Invoice discounting providers usually offer up to 95% in advance payment. Businesses use invoice discounting for ongoing periods, or to cover their entire sales ledger, which means better rates and lower fees, making it usually a far more cost-effective source of funding than other cash flow management options.

Retaining ledger control

Another significant advantage of invoice discounting is that you can retain control over your own sales ledger and relationships with clients. You don’t have to disclose to customers that you’re using a finance provider, which can sometimes affect your customer relations. It is also a quick way to raise money. Some lenders provide finance within as little as 24 hours, making it an effective solution for immediate financial troubles.

Flexibility

Invoice discounting is also a very flexible cash flow management solution. As your business grows, you can extend the cash available in your facility, allowing you to boost your purchasing power continually. Selective invoice discounting, in particular, is a popular option as there are no long-term contracts involved. There’s a one-off fee per invoice, and there are no fees if you choose to leave a selective invoice discounting agreement. It is a far more flexible option as you can pick and choose when you use it, and you get to maintain complete autonomy over your accounts receivable.

Disadvantages

Fees can be disproportionate

Fees are charged against the entire turnover of the business. However, most invoice discounters don’t allow companies to secure finance against their whole sales ledger, which can mean the fees are disproportionate when it comes to how much funding is being secured.

Difficult to obtain with a lower turnover

It can also be challenging to obtain invoice discounting for companies with lower turnover. Lenders typically look for businesses with a minimum turnover of £250,000, although some may consider smaller businesses or even startups.

Getting setup can take time

While invoice discounting is one of the quicker methods of securing finance, bear in mind that if you are opting for selective invoice discounting, it can take a while to set up a selective facility, usually several weeks at a minimum. This time can be costly for a company needing operating liquidity now.

Is my business eligible for invoice discounting?

Invoice discounting is predominantly used by established businesses. More often than not, only companies with a relatively high turnover are eligible. Most lenders require their clients to have a turnover of at least £250,000, some lenders even stipulate a minimum of more than £500,000. On top of this, they will want assurance that your customers will pay, and will pay on time.

It is, therefore, only a suitable source of funding for companies with a proven track record and robust credit control processes in place.

Additionally, as the unpaid invoices serve as a form of security for the borrowed money, if your company has already used its accounts receivable as collateral for another finance arrangement, you likely won’t be eligible for invoice discounting.

Can I secure invoice discounting if my credit rating is poor?

Invoice discounting is an option for companies who have previously been refused traditional bank finance, owing to poor credit. As the funding is based on sales invoices, the credibility of your customers is more important than your own company’s credit rating.

In essence having or building relationships with credit-worthy customers will help you acquire a lender. What’s more, using this kind of finance can be useful for rebuilding your own businesses credit rating.

How quickly can I arrange invoice discounting?

Applications for invoice discounting can take several weeks. Some lenders will be able to approve your request within a week. Once an invoice discounting agreement is in place it is a fast way to get access to sizeable amounts of cash. Most lenders will release funds to your business bank account within 24 hours of receiving an invoice.

What type of businesses use invoice discounting?

Invoice discounting is generally useful for profitable businesses that have difficulty reconciling the timing of cash coming in against the money going out.

Below are some examples of invoice discounting put into practice in fields where invoice discounting can prove particularly useful. Businesses in these sectors are typically funded by large clients with extended payment terms, making it challenging to maintain steady, healthy cash flow. If your struggling to decide if invoice discounting is right for your business, below are examples of how businesses in different industries use it.

Construction

Juggling incomings and outgoings can be challenging in the construction industry, particularly if you’re at the bottom of the pyramid. Sub-contractors at the end of the chain often experience lengthy delays in receiving payment.

Using asset-based lending companies to receive advanced funds can be helpful for independent contractors and sole-traders, providing them with enough capital to bid for jobs on an equal footing with established businesses. More working capital means you can invest in more materials and get going with other jobs.

Logistics

Late payment is a common problem within the logistics industry. It’s also an industry which incurs costs throughout the month, from purchasing fuel to keeping up with vehicle maintenance, on top of paying staff and keeping business operations afloat.

Using invoice finance can provide logistic companies with financial security, providing a regular influx of cash throughout the month (this steady income is key to growth within haulage companies, when releasing capital constantly is necessary to maintain or expand their fleet).

Manufacturing

The manufacturing industry is another one which requires careful juggling of cash in and cash out. Manufacture is a process of sequential stages, and one late payment can throw the whole process out of whack, delaying the production time and, as a result, the arrival of income in revenue.

Invoice discounting can help to remove the burden of aligning outgoings against income. With the time pressures removed, a manufacturing company can focus on the bigger picture, and use this available cash to expand, accept new orders and grow their enterprise without the pressures of short term cashflow issues.

Recruitment

The recruitment industry is notorious for having disparate cash flow. Business owners typically experience a large gap between paying their staff and receiving payment for their services, and struggle to get customers to pay on time. Company development can seem impossible for executives at recruitment firms experiencing such a significant lag between money out and money in.

Invoice discounting can provide an invaluable stop-gap for recruitment companies. Receiving cash for work done immediately can be a game-changer in this industry, easing the burden of payroll and opening opportunities for taking on more clients.

How much does discounting cost?

There are two charges involved in invoice discounting. These are the service fee and the discount fee. Be aware, however, that there may be other charges, such as an early termination fee, so be sure to check the small print.

Service fee

The service fee represents the annual cost to your business of maintaining the facility. It covers the management and administration of your account and usually represents a percentage of your company turnover, typically 0.25%-2.5%. As your turnover changes, the service fee can change as well.

Discount fee

The second cost is the discount fee, which covers the cost of borrowing. It applies to each invoice individually, similarly to the interest on a loan. This fee usually represents 0.5%-3% of the total amount of the invoice for which you receive an advance. This amount can fluctuate depending on how long your customers take to pay their outstanding invoices.

Which factors affect the fees?

How much you pay depends primarily on the level of risk to the lender. A lending company will use several factors to determine their risk level, including:

  • The industry in which you trade: some industries carry a higher risk due to inherently long payment terms (in this case factors might want to also see a sufficient level of trade credit insurance in place).
  • How many customers you have
  • How many invoices you send per month
  • Your track record of payment collection
  • How robust your payment collection methods are
  • With or without recourse.

When it comes specifically to invoice discounting as a form of asset-based lending, lenders will principally assess the price of your fee based on your company’s turnover, your customers and the level of funding you require.

With or without recourse?

Another significant factor determining how much you must pay is whether you come to an agreement with or without recourse. A clause stating that the deal is with recourse typically means that lenders have the right to their fee and the amount of the invoice already advanced, even if a customer defaults on payment. In other words, your company remains liable if your customers refuse or are unable to pay.

On the other hand, should a lender offer you a discounting agreement without recourse, also known as a non-recourse agreement, this generally indicates that the lender is assuming full liability for customer debt. Non-recourse is also known as Bad Debt Protection and is designed to shield companies from the risks of delayed or unfulfilled payments (effectively a type of business insurance). If your customers are unreliable, this could be a good option for you, as it can remove the pressure of non-paying customers.

However, the fees for an agreement without recourse reflect this higher risk for the lender. Finance providers typically charge considerably higher fees and offer a smaller advance in these arrangements, which can be challenging for companies that require immediate access to significant amounts of cash. Additionally, you must carefully check the terms and conditions that come with a non-recourse agreement. In the case of some invoice disputes, the lender won’t assume liability for the debt, even with a non-recourse arrangement in place.

Choosing between non-recourse and recourse invoice discounting is tricky. There are a number of factors to consider, such as the potential savings for the company long-term, weighed against the damage of being liable for a single or multiple unpaid invoice.

Negotiate on discounting fees

When it comes to getting a good deal, there’s always room for negotiation. There are hundreds of lending companies on the market. Even if you don’t fulfil all the eligibility factors considered above, it’s worth reaching out to multiple companies. Not all lenders were born equal, and some will find your business a lower risk than others. Engaging with your potential lenders and pitching your business to them can go a long way in procuring a better deal. If you can convince your lender that your industry, company and customers are low risk, you’ll pay less.

Some lenders will agree to reduce their fees once you have sold them a certain number of invoices, once they can see that you’re credible, and your customers are trustworthy. It’s worth seeking professional advice on securing an asset-based lending contract, to find out what conditions and rates would best suit your business.

Choosing an invoice discounting provider

Invoice finance is increasing in popularity, meaning there’s more competition than ever. Take the time to fully research your options before you settle on a lender. When researching there are several important things to bear in mind:

  1. Using invoice finance can exclude you from other forms of business finance – before accepting any invoice finance, ensure that it won’t disqualify you from any other financial services you may need
  2. Check that your lender is a member of the Asset Based Finance Association and UK Finance, industry bodies which ensure their members agree to its codes of practice
  3. Consider using an invoice finance broker to help you choose an arrangement that works for you.

Case study

If your still not sure quite how factoring works, here’s a quick case study. A family-run recruitment company based in the midlands is looking to expand. The company provide temporary and permanent staff to fulfil a range of positions in the Derbyshire area, including positions in local councils and well-known charities. The firm has seen tremendous growth in the last year, owing to its excellent customer service. However, this growth has come with substantial financial pressure, as the owners struggle to reconcile their cash flow.

The company has a turnover of £500,000, which they expect to double over the next three years. To achieve this impressive growth, they require help to remedy the lag they are experiencing between their deadlines to pay staff and their income from clients.

The company has loyal clients who tend to pay on time. That said, many have payment terms of up to 90 days, which is difficult to reconcile with mounting payroll pressure in busy periods. The business approached an invoice finance broker to discuss their cash flow trouble.

The broker recommended that the company opt for invoice-based borrowing. They found the business an invoice discounting finance solution with a lender offering a 90% advance rate for the invoices. The broker negotiated a facility for £350,000, covering the firm’s entire sales ledger. Using this facility to support ongoing investments, the business expects to triple its turnover within three years, demonstrating how invoice discounting can enable company growth.

Final thoughts & FAQs

Invoice discounting offers enormous potential for businesses where cash flow problems are an inherent part of their operating model. Invoice discounting can be preferable to other forms of borrowing because it’s based on money coming in in the near future.

By leveraging the value of your sales ledger, you’re unlocking capital that is almost certainly coming back in, which lowers the risk of this type of funding when compared to more traditional types of borrowing.

Whether you’re looking to grow or simply to fill a stop-gap created by one or two problematic customers, invoice discounting can enable you to unlock funds tied up in unpaid invoices without having to wait for the end customer to pay up. This financial flexibility can be of enormous value to your company.

Is invoice discounting the same as invoice factoring?

Invoice factoring is another form of invoice finance. It is similar to invoice discounting in that a lender will provide you with a cash advance for invoices owed to you, in return for a fee.

The principle difference is that the provider oversees your credit control. Customers will be aware that you are using an invoice company and will have to pay directly to the third-party, and deal with them in case of any issue.

While this removes some responsibility and work on your part, many customers object to third-party involvement. If you’re going to consider invoice factoring, it’s essential to learn about their collection process to decide whether it could have a damaging effect on customer relations in the event of delayed or non-payment.

Is invoice discounting regulated?

The asset-based finance industry is currently not regulated by the Financial Conduct Authority (FCA) in the UK. The FCA regulates the conduct of thousands of financial services firms in the UK and ensures that all its members fulfil specific standards and adhere to certain rules. Without regulation by the FCA, invoice finance providers are not accountable to particular levels of service.

That said, many asset-based financiers also provide other financial services, for which they must adhere to regulation from the FCA. If the FCA lists your lender for its other financial services, the chances are that it’s a trustworthy finance provider.

Related posts

Owing to the lack of regulation when it comes to asset-based finance, borrowers must exercise caution when it comes to sourcing a lender. Practise due diligence when comparing finance providers. In particular, ensure that:

  • your contract does not exceed 12 months
  • all fees are explicitly clear and that there are no hidden charges
  • the agreement includes a termination clause
  • termination fees don’t exceed two months of service fees.

Source: https://entrepreneurhandbook.co.uk/invoice-discounting/

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