Everyone knows that the UK’s startup scene is bustling with innovation. These fast-growing firms contribute a huge £196 billion to the British economy every year – creating jobs, pioneering products and services and bringing tech solutions into the market. 

Yet despite playing such an important role, access to finance is not always guaranteed for these enterprises…

 As you probably already know, when a startup is in its early stages it faces one of its most difficult challenges in managing cash flow. These new ventures require adequate working capital to cover high overhead costs and continue business operations running smoothly. 

Many funding options can be difficult for startups to secure. However, for entrepreneurs who want to take control of their cash flow, invoice finance has emerged as a viable solution. 

 

What is invoice finance?

In recent years, invoice financing has become extremely popular among startups and small businesses. Broadly speaking, invoice finance provides businesses with a way of raising money against their customers unpaid invoices. It is a blanket term that can be broken down into three main categories.

  • Invoice discounting 

Discounting allows businesses to raise funds against unpaid accounts receivable (the balance of money due to a company for its goods / services). With this option, the value of your sales ledger helps to determine the amount of money your startup can gain access to. 

After securing finance, you must continue to ensure payments get made by customers and clients. For this reason, your clients will not know that you have worked with a discounting provider. 

  • Invoice factoring 

Operating similarly to discounting, factoring also helps firms raise money against their unpaid invoices. The difference is, after being provided with a sum of money, the lender then absorbs responsibility for collecting payments from your clients and customers. 

Only after the lender manages to successfully collect payment will you be sent the remaining amount owed minus their fees for collection. 

  • Selective invoice financing 

Unlike factoring and discounting, this type of finance allows businesses to pick and choose the invoices that they would like to sell to a finance provider. 

Selective invoice finance is a good choice if you don’t want to raise money against your full sales ledger. It provides businesses with more flexibility over which invoices get financed and when. 

 

How can startups benefit from invoice finance?

The main reason why invoice finance works so well for startups, is that it provides an affordable and easy way of getting quick access to working capital

This cash flow solution offers several benefits for business owners looking to borrow money or obtain business finance. Some advantages include:

  • It is easier for startups to access compared to traditional funding like business loans.
  • It removes the worry of late invoice payments and alleviates stress for business owners. 
  • It can be used to fund business emergencies and unforeseen events. 
  • Credit history is not the main determiner when seeking approval.
  • Depending which provider you choose, it is a short-term funding solution with no necessary long term commitment. 

 

Which invoice finance provider is best for my business?

The world of business funding is changing. With more and more innovative digital platforms entering the market, it is starting to become easier for startups to get access to the finance they need to help them grow. 

Before making any decisions, it’s important to research which type of invoice finance will best suit your startup’s needs. 

 

Traditional invoice finance facilities

If you choose to finance your startup through a traditional invoice provider, you should be prepared to enter into a lengthy contract. This is because factoring companies usually require you to sell your ledger for a longer period that can last up to 24 months. 

Whilst these longer commitments can help more established companies access lower factoring rates, smaller firms should proceed with caution. 

 

Requirements

Unlike selective invoice finance, this type of funding often requires a factoring minimum. By agreeing to the minimum, you become contractually obliged to raise money against a gross invoice volume for a certain term. 

The minimum factoring requirement will vary from provider to provider, but it can help your business to secure lower factoring rates. Though this suits companies that can meet the commitment, it tends to limit flexibility, which doesn’t suit startups that have unpredictable revenue. 

 

Be wary of additional fees

After signing up for this type of agreement, additional costs can occur, even if the facility is not being used. When going over the contract, be sure to look into the different fees being charged. These can include credit checks, schedule processing, due diligence and invoice processing – if you’re not careful, it can really add up. 

 

Liabilities for non-playing clients

Another term you should be aware of is recourse factoring. Under this agreement, your business is required to refund the money, or buy back the invoices in the event the lender is unable to collect payment from your client. 

 

Alternative invoice finance providers

In recent years, new players have entered the lending scene and become extremely popular among SMEs. 

Taking a new approach to finance, these alternative invoice finance providers are better geared towards freelancers, startups and small businesses. This is because they can offer business owners greater flexibility by providing facilities that can work around their business model. 

As most of these providers are online, setting up finance is simple and convenient. Take Penny, for example – a selective invoice financing provider that offers its customers more than just convenience.

 

No long term commitments

The Penny platform enables business owners to create a profile in a matter of minutes. After signing up, your account can be viewed easily online or from the app. Business owners can then use Penny’s template to create invoices that they want financed, with no minimums required.

Access money owed in a matter of days

Often, traditional finance can take days or weeks to arrange. Time isn’t always a luxury that startups have, particularly in the event they’re already grappling with late invoice payments. 

Knowing that invoices can take up to 30 days to get paid (and sometimes even longer), Penny aims to process payments in 1 – 2 days. What’s more, instead of charging hefty set up costs or monthly fees, they finance the invoices for one small fee of 2.5%.

 

Be covered by bad debt protection

After buying a startup’s invoice/s, Penny takes responsibility for following up with the clients in order to receive payment by the invoice due date. 

Unlike providers that require recourse factoring, companies like Penny offer ongoing protection against loss through bad debt protection. This means that in the unfortunate situation your client was to default on repayments, no action would be taken against you that would financially impact your business. 

 

A cash flow solution that’s here to stay

The number of startups that are experiencing invoice payment delays continues to grow. With UK SMEs owed over £24 billion collectively, invoice finance providers are playing a pivotal role in ensuring new venture survival. 

It goes without saying that invoice finance is an ideal cash flow solution for businesses big and small. So, if your startup is in need of a steady stream of working capital, it’s definitely an option worth considering.