You may have seen our article last week about peer to peer lending. There are a multitude of ways to secure funding for your small business that don’t involve going to the bank and may well be much more successful. It’s all about finding the right option for you.

This week we’re highlighting …

Invoice financing

If your up front costs are high, another option is to look at invoice financing which is where a third party agrees to buy your unpaid invoices.  They pay the invoice to you and charge you a fee. They then collect the money owed on the invoice from your customer.

The benefits to you: you get an up front boost to your cashflow and the independent party will usually take care of some of the admin associated with offering a credit line. If you’re wondering whether or not this is a method others are happy using, the ABFA reports that the UK is a growing market for asset based finance accounting for 26% of asset based finance market in Europe during 2015, up from 24% in 2014.   

It’s a good option if you:

  • Want to offer credit to your customers without having to wait for them to make payment / without having it affect your cashflow
  • Want a lending solution that will scale with your business, rather than remain a fixed amount. You are borrowing against existing business assets (your own invoices) so as your business and contracts grow, so will the available loan amount.

It may not work for you if:

  • You are keen to keep control of customer relationships (a third party demanding swift payment is not always welcomed by customers)
  • You wish to control credit agreements – third parties may have more stringent credit terms that you would be happy to offer well known clients

As with any way of generating finance, this option has risks and pitfalls that apply differently to different kinds of business, which you should check carefully if you’re considering it. The Asset Based Finance Association (ABFA) are a UK based Trade Association that sets and enforces industry standards, so they’re a useful source of information for anyone exploring this option.

For more information you can also look at the gov.uk pages on invoice financing.

Other articles in our alternative finance series:

Invoice financing offers a way to scale
your business loan as the business grows

Categories: Team4 News