Invoice Finance for SMEs

Friday 7th January 2022

SME invoice finance is a finance facility provided by an invoice finance provider to help SMEs leverage their unpaid invoices in order to provide an instant cash injection into the business.

Approximately 41,000 companies rely on some form of SME invoice finance, but that’s a tiny minority of the UK’s total SMEs. About 5% by most estimates. And that’s interesting, because an estimated 40% of UK SMEs say they have cash flow issues. For the record, that means that approximately 800,000 businesses are struggling to maintain positive cash flow, and don’t know how to improve it.

In this article:

  • The effects of poor cash flow
  • How SMEs can improve cash flow
  • Invoice finance for SMEs

The effects of poor cash flow

Poor cash flow - where a businesses’ outgoings are greater than it’s month-on-month income - can cause some fairly serious problems. Irrespective of whether your owed large sums of money from regular clients, it can turn everyday matters like:

  • Paying rent
  • Keeping up with payroll
  • Buying new stock
  • Investing in new equipment
  • Funding sustainable growth
  • Training your staff

Poor cash flow can also put a lot of strain on business owners and/or directors. Particularly if the company is young, and responsibility for chasing up unpaid invoices falls to people who should be focused on growing the business.


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How can SMEs improve cash flow?

If this struggle sounds familiar, you may be interested in exploring invoice financing. SME invoice finance is an increasingly-popular type of asset-based financing that allows you to unlock unrealised potential by raising cash against the value of unpaid invoices. Think of it as selling your sales ledger, or (if you use an invoice discounting facility) using unsettled invoices as collateral for a low-interest business loan.

SME invoice finance is a great fit for businesses that offer 30, 60 or 90 day payment terms to their B2B clients. It removes the long wait time that causes so many cash flow issues, and it’s also a great way to fund the early stages of growth.

Using a standard SME invoice finance facility, you:

  • Issue invoices whenever you deliver goods or services
  • Forward your invoices to your factor on the same day
  • Receive 80-90% of the invoices’ value within 24-48 hrs*
  • Wait until the invoice is paid, and then settle the account with your factor

(*depending on the terms of your agreement)

Because SME invoice finance uses a tangible asset as collateral, interest rates and fees are generally quite low. SME invoice finance facilities are also consistent; paying out every time you issue a customer invoice which means that you are all-but guaranteed a steady stream of ready cash.

Invoice Finance for SMEs

Typically, small to medium sized enterprises (SMEs) are offered invoice factoring arrangements by specialist lenders. Invoice factoring is a specific type of invoice financing that involves outsourcing your sales ledger to the factor you are borrowing from. You issue invoices to all of your clients as usual, but the factor takes responsibility for chasing the invoice, and your client will pay the factor instead of you.

In most cases, the factor will then pay you the remaining value of the invoice minus any fees.

Invoice factoring agreements are a great fit for SMEs because they remove the (often costly) necessity of employing your own credit control department. Instead, you get the benefit of your factor’s in-house resources, and years of credit control experience. You also free up time that can be used to grow your business but there are some disadvantages.

Namely, that your clients will know that you’re using an invoice factoring service. You’ll also be outsourcing some of your client-side communication which can cause problems if your clients are used to dealing with you. Ultimately, it’s important to do your own cost/benefit analysis before you engage with an invoice finance facility, but it’s worth remembering that invoice factoring can smooth over cash flow issues. Particularly if you are running an SME.

Interested in an invoice finance facility to boost your businesses cash flow?

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