Congratulations! You’re an experienced builder with an established construction company. You have contracts in place for ongoing building jobs and a reliable crew to carry out the work. The only problem is cash flow; you can’t start the next project until you get paid for the last one! And that particular client works on 90 day payment terms so it’s 3 months of thumb twiddling before you can crack on.
That’s where Invoice Finance (or Factoring) fixes the issue. With an Invoice Finance facility in place, you can release cash from any outstanding customer invoice on the day it is raised. Forget about 30, 60, or 90 days waiting for your hard-earned capital to hit your account. An Invoice Finance provider essentially buys the invoice from you, with a minimal fee attached, so you get paid pronto!
Who is Eligible for Invoice Finance and How Does it Work?
There are a number of factors that can affect eligibility for Invoice Finance so be prepared to answer a few nosy broker questions. This is just to assess your business and decide which facility will be the best fit. One advantage of Invoice Finance is that it is secured against your invoices so you won’t need to be turning over a certain amount or have a bulletproof credit history to be approved.
The amount you can borrow depends entirely on how much you have tied up in outstanding invoices, and the cost is determined by the lender based on your circumstances. Asides from a minimal set up fee, you will typically be charged between 5% & 10% of the invoice value. So if you bill for work carried out to the tune of £10k, the lender will pay you £9.5k on the day you raise the invoice if their fee is 5%.
What if I don’t want my customers to know I use Invoice Finance? There are 2 options here, confidential invoice financing means your customer is totally unaware of the lender and you keep your client relationship ‘in house’. The other option is full factoring whereby the lender will even chase your customer for payment!
Example Case Study: Builder Brothers Ltd
Ryan is the director of Builder Brothers Ltd. He has just finished a property development for Sunset Homes and is eager to get the team onto the next building job, a new contract with Evergreen Properties. Annoyingly, Sunset Homes work on 90 day payment terms so Ryan has no working capital to buy the materials needed to start the Evergreen Properties job. He has billed Sunset Homes £100k for the sterling work carried out by his crew but won’t see penny one for 3 months!
Ryan is savvy so he applies for Invoice Finance. He provides all the required paperwork in a timely manner so his facility is set up within a couple of days. Straight away he is able to release £85k of the £100k owed to him so he can start the new job, purchase materials, and make sure payroll is covered. Ryan doesn’t like dealing with Sunset Homes so the IF lender chases them for full payment of the invoice and makes sure Ryan receives the rest of the money, less the agreed facility fee.
Now with the Invoice Finance facility in place, Ryan knows that as soon as Builder Brothers Ltd completes the work for Evergreen Properties, they will get paid the majority of the invoice with immediate effect and can crack on with the next contract. Be like Ryan!
Who Can I Speak to About Invoice Finance?
Invoice Finance is becoming more and more prevalent these days and some industries literally couldn’t operate without it. This means that there are a lot of providers and a lot of different options. Do yourself a huge favour and simply have a conversation with Reform Financial. With over 20 years of Invoice Finance experience under our belts, we will be able to identify the best type of facility for you following a free consultation call.
I hope you have found this article helpful but unfortunately it doesn’t cover everything to do with IF. For example, what if one of your clients is unable to pay your invoice? You can take out what is known as ‘bad debt protection’ whereby any losses are absorbed by the funder. Did you also know that you can only have one IF provider? To avoid pitfalls like these and to get any other questions you may have answered, please speak to us about Invoice Finance today or click HERE.
