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Posted on 02 May, 2011

Is invoice finance the new business overdraft?

Whilst bank overdrafts are still the most popular form of borrowing for SME’s, banks are increasingly raising the costs of this traditional form of borrowing and tightening up on lending criteria.

The latest Economy Watch Survey by the Forum of Private Business highlighted reductions in overdraft facilities to small businesses with some businesses reporting reductions of more than 50% and even outright cancellation of facilities.

As banks continue to reduce their exposure to overdraft lending SMEs are forced to seek alternatives to fund their business operations.

Invoice finance in the form of invoice factoring or invoice discounting is fast becoming the popular choice with many businesses.

The invoice finance market

The invoice finance market is a growing sector of the UK business funding market. In 1995 only 13,000 companies in the UK used invoice finance. This has grown to over 50,000 companies today with over two-thirds of all businesses who use this form of finance tur ning over less than £1 million.

What is invoice finance?

Invoice finance is an effective and flexible way for small and medium sized businesses to fund working capital and business growth.

It basically turns unpaid invoices into cash and the lender will advance up to 90% of the value of the invoices, using the borrower’s debtor book as security. When the invoice is paid by the customer the remaining balance on the invoice is paid after deducting the lenders financing fees.

There are generally two costs associated with invoice finance, a service fee (generally a % of turnover) and a factoring fee (interest cost on the amount borrowed).

There are now many variants of invoice finance but they mostly fall into two categories:

Invoice factoring which generally involves making customers aware of the facility and the factoring company providing a full credit control service.

Invoice discounting is generally a confidential facility which the end customer is not informed about and advances are made against the overall debtor book.

Bad debt protection is an option generally available on both types of facility.
Business Services UK Ltd


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