Invoice finance (which includes factoring and discounting) is an increasingly popular category of finance for UK SMEs, and aims to deal with the problems that occur when invoices don’t get paid on time - namely cash flow.
In short, when your business raises an invoice, you can immediately borrow against most of the value of it. However, many people will wonder what the requirements are for invoice finance, and who is actually eligible to take advantage of it. Let’s take a look here.
In this article:
- Invoice finance requirements
- What sectors can use invoice finance?
- Who is invoice finance suitable for?
Invoice finance requirements
There are a few criteria that need to be met in order for you to apply for an invoice finance facility with most of the larger providers.
Your business needs to be one that deals B2B and normally raises invoices for payment
- A minimum turnover threshold is generally required of around £50,000
- You’ll need proof of your accounts and ideally a good business credit report
Naturally, it is likely that you will require credit and affordability checks when you apply for an invoice finance facility, so set criteria will not be available online that fully reflect whether or not an invoice finance facility will be available to you. There can also be a lot of flexibility around business sizes, so it’s worth enquiring if you’re not sure. Very small start-ups might need collateral however, and are often required to be homeowners.
What sectors can use invoice finance?
Most sectors involved in B2B are able to use invoice finance provided that they meet the above criteria. However, some industries naturally find that they’re more likely to use it than others.
Businesses involved in supply chains are often ones that are very likely to need to use invoice finance, because along with the chain of supply, there’s inevitably a chain of invoices. Those lower down the rungs often find that their invoices are frequently paid late, or carry very long payment terms by default. Similarly, recruitment businesses that rely on prompt payment of invoices in order for them to meet payroll also often find that they need to use an invoice finance facility for the success of their business.
Who is invoice finance suitable for?
We’ve taken a look at the eligibility for invoice finance, but how about who it’s actually suitable for?
Ultimately, invoice finance is about cash flow. If your business is struggling with cash to meet payroll or even expand, then it’s because there’s a cash flow issue.
However, to determine if invoice finance is the right product, you need to determine the route cause of the cash flow problem. If it’s down to profitability for example, rather than late invoices, then invoice finance may not be for you. Consulting an independent financial advisor is often recommended in order for you to ensure you’re making the best decision for your business.