11/04/2011

By Kedisha Burnett, Touch Financial

For a majority of start-ups, moving from a well thought out idea to a successful and emerging entrepreneurship means a myriad of challenges.

With little or no trading history, this is no more so true than for start-ups and small businesses seeking to attain or extend affordable funding capital.

But, apart from the well trodden traditional routes of sourcing finance, there is a less popularised finance source that is not widely publicise and to which many banks does not offer as an option even though they may have the service available.

And what is this form of finance? With over 42, 000 UK firms documented to be using this funding method (according to the ABFA), Invoice Finance is a viable funding solution for businesses looking to raise additional finance or simply seeking an alternative.

Start-ups and small businesses will often have contracts that demand the completion of work but to which payment is frequently long standing or even in some cases, late. But, with those all important expenditures still having to be paid, a huge burden is often placed on cash flow and working capital.

Factoring, a form of Asset Based Lending, generates finance against the value of outstanding customer invoices; giving you greater access to cash and in effect, relieving the pressures on your cash flow.

Once approved by your lender, up to 95% of the value of your factored invoices could be made available within 24 hours to you by your lender. Further, as part of your Invoice Factoring facility, the lender could also manage your sales ledger and payment collection (with small service charge taken into account), though not in every instance.

You could also use a service called CHOCS (client handles own collections) where you continue to collect payment from customers, if you are nervous about exposing your customers to a third party collection service.

Compared to conventional borrowing such as loans and overdrafts, under invoice finance, there are fewer conditional requirements and you are more likely to benefit from suppliers’ early payment discounts, reduce other forms of borrowing, increase distribution and grow at a faster pace.

Businesses using invoice finance facilities benefit from significant related savings on a number of costly overheads such as package stationery and telephone calls. In addition, clients without tangible security using Invoice Finance will be able to gain up to four times more cash flow vs. an overdraft.

Sounds too good to be true? Perhaps. Current estimates have suggested that over £1 million of the 4.8m SME businesses in the UK could qualify for Invoice Factoring but are not necessarily aware of this fact.

Eligibility:

o Unlike banks who want to see evidence of trading and cashflow history as well as formidable signs of growth, an invoice finance lender provides funding against your book debt and will typically therefore require less in the way of additional collateral.

o £50+ turnover.

o This finance option is generally open to businesses with customer payment terms over 15 days.

o If your business operates in the construction sector, then you must be a home owner so as to secure the loan. This is because of the greater level of risks in this sector.

`With significant changes to the market, Invoice Finance is no longer just an alternative.`