Over the last few weeks we’ve looked at the kinds of business that can use Invoice Finance, how it can be a key source of funding, and just how much cash can be raised.
We’ve seen that more and more businesses are choosing Invoice Finance. In some countries, such as Britain, it is now rivalling bank lending as the finance of choice for small and medium-sized businesses.
These SMEs know that there are advantages to Invoice Finance in terms of security, availability, and the fact that the amounts you can raise continue to increase as the business grows and invoices more and more (the facility provided is based on revenue not profitability), but that alone would not explain its popularity in countries where it is widely known: the fact is, Invoice Finance is often a cheap funding source that a business can find and utilise.
How Cheap is Invoice Finance?
Charges vary considerably among providers of Invoice Finance, but the best companies – like OptiPay – have a clear and simple fee structure. You will normally be charged a fee for every invoice that you raise cash against, and that fee is taken when your customer pays the invoice and because the money is secured by the invoice itself, the fees can be very modest indeed.
We have seen that businesses which trade on a B2B basis can access about two months’ worth of turnover. If a business raised that the funds via a bank loan, it would most likely have to pay an establishment fee, a commitment to paying interest on the loan on a weekly or monthly basis, repayment of the principal on a weekly or monthly basis until fully repaid, and then often other ‘ancillary fees’ too. Should the business find itself in the unfortunate position of being late on a re-payment due to an unforeseen cash flow problem, it will also then be looking at a stiff penalty or default fees. None of this applies to Invoice Finance solution provided by OptiPay.
With a Business Loan, all of these charges need to be factored in to come up with the total cost of borrowing. For Invoice Finance, on the other hand, things are much simpler – at least if you’re dealing with a reputable and nimble fintech provider, like OptiPay.
How cheap is Invoice Finance? Just ask one of our helpful customer advisors and you’ll get the exact answer as to what raising “x dollars” will cost your business, as being a bespoke offering there is not a ‘one price fits all’.
Flexible = Cost Effective
The straightforward fee structure is not the only reason that Invoice Finance should be considered against a business loan – regardless of the headline interest rate claimed by these small business loan providers.
Imagine a company that has plans to grow its turnover by 30-50% over the next two years: this is a realistic ambition given the right investment, but by no means guaranteed. The company borrows accordingly but the market takes a turn for the worse and it can only grow by 20%.
Under ordinary circumstances, 20% turnover growth in two years is a decent result, but because the company borrowed more than it needed over that time, the extra interest and fees and not to mentioned the likely increase in working capital due to the extra staff and other costs incurred by the business, in anticipation of this growth, will have eroded its profit margins considerably.
Had the same company chosen Invoice Finance to fund its expansion, the amount it borrowed would have been relative to its sales ledger at all times. It would effectively have provided a rolling facility which grew by exactly 20% over the period, and had it grown faster, the extra funds would have been available to the business, to provide the extra working capital.
The lesson is that because Invoice Financing always reflects the current state of a business’ sales ledger (or receivables ledger), you always access exactly the right amount. With a loan, on the other hand, a business must borrow more than it really needs or risk being short of funds to take advantage of opportunities should they present themselves.
In many cases, Invoice Financing is cheaper than traditional Business Lending even when comparing the same amounts, but the fact that you never over-borrow is an added benefit that can save a business thousands of dollars in interest payments on money it never needed in the first place.
Get tomorrow’s cash flow today.
