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Q & A

Could invoice finance improve your cash flow?

The business benefits of invoice finance

Lee Baty, Head of Corporate and Business Banking, Global Trade and Receivables Finance UK, answers key questions on invoice finance and how it can ease cash flow.

Do enough small businesses know about invoice finance?

Lee Baty (LB): “Among small businesses and their advisors, there’s a strong and growing understanding of the benefits of invoice finance. Data from UK Finance [the organisation that represents leading providers of finance, banking, markets and payments-related services] shows that small businesses are the UK’s largest segment of invoice-finance users. More than 30,000 UK businesses with a turnover up to £5m use invoice finance.

“Many other businesses could be using invoice finance, but instead they’re funding their working capital needs through their overdraft or loans. Invoice finance isn’t always the right solution, but when used it can have a highly positive effect on cash flow and the capacity to grow.”

What is invoice finance and how can it help?

LB: “If a business sells on credit to other businesses, typically, invoice payment terms are 30 or 60 days, which creates cash flow pressure while they wait to get paid. Invoice finance can provide up to 90% of an invoice’s value the day it’s issued, with the rest received, less fees, once the buyer has paid. The business can draw as much or as little funding as it needs, and at HSBC this works the same way for both UK and international sales. And as the business sells more, more finance is available, it grows as you grow.”

Is it easier for small firms to get invoice finance when compared to other finance?

LB: “It’s important to get the right funding solution. With invoice finance a provider will want to understand your business’s trade cycle and when your customers pay. It can take a little longer to arrange invoice finance compared to other options, but the benefits can make this worthwhile.”

What types of small business should consider invoice finance?

LB: “Typically, a business that sells on credit terms to a range of good quality buyers. They will be well administered, with a low level of returns or credit notes, invoicing after the sale is complete, and trading either in the UK or internationally. Maintaining healthy cash flow is essential, so, if your business has cash tied up in unpaid invoices, you should seriously consider invoice finance.”

What’s the difference between “factoring” and “discounting”?

LB: “They’re both types of invoice finance, but with factoring, the invoice finance provider manages your credit control. They send out statements and reminders to customers, chase up invoices when due and handle incoming payments. Obviously, your customers then know someone else is chasing up payment on your behalf, but it can also save you a lot of time and effort, although fees are payable.

“With invoice discounting, you’re responsible for your own credit control, so you chase up overdue payments. You might not want another organisation to approach your customers for payment, perhaps. Your business should have robust credit control measures and good administration if you pick invoice discounting.”

What are the costs associated with both?

LB: “Firstly, a finance charge, which is normally comparable to an overdraft, applied to the funding the business actually uses. Secondly, there’s an admin charge determined by what solution you’ve chosen. It’s higher for factoring because of the additional value you get from someone else managing your credit control. If you decide to take out optional credit protection against late or non-payment of invoices, there will also be a fee for this.

“As with most financial services, there’s also a one-off arrangement fee. The actual costs depend on the type of solution, the size of your business, the volume of invoices and other factors. At HSBC all costs are fully agreed in advance.”

Can I choose which invoices I sell?

LB: “Most large invoice finance providers find that the facility works best when all sales are assigned to them, because this enables maximum funding across the entire sales ledger. There are solutions available where businesses can select individual invoices to finance, but the transactional nature of these facilities is very different, and the cost per transaction can be higher.”

What invoice finance solutions does HSBC offer to small firms?

LB: “Factoring and invoice discounting solutions, depending on the business’s needs and eligibility. We can provide funding in all internationally traded currencies and funding against UK sales, or use our global reach to handle exports to more than 200 countries and territories worldwide.

“We provide a named invoice finance manager, who will work with you so you get the best out of your facility, supported by a client services team to assist with day-to-day administration or provide credit control services. All of our facilities can be accessed online, giving you control and visibility of your funding.”

What three key pieces of advice do you offer to small businesses considering invoice finance?

LB: “If you’re continually extending your overdraft or loan facilities because of unpaid invoices, find out whether invoice finance could provide a better solution. If you’re selling overseas or considering it, invoice finance could enable you to offer attractive open-account credit terms to buyers, or bridge the cash flow gap caused by longer export payment terms, while offering protection against non-payment. And think carefully about what service level you need. Sometimes the cheaper invoice finance solutions on the market come with a lower level of service, for example, only funding invoices for a set period or perhaps have hidden charges. At HSBC we are fully committed to fair and transparent pricing and any charges are agreed with clients in advance.”

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