Differences between business loans and invoice finance

You’ve probably heard of bank business loans, but you might not be as familiar with the inner workings of Invoice Finance. Here we look at two methods of alleviating pressure on business cash flow.

Let’s look at bank business loans first. A business loan allows you to borrow a particular amount of money over a specified amount of time, usually with fixed interest rates and set monthly payments.

Most business loans are repaid within one to three years. However, in order to even be considered for a bank loan, the business most likely will have had to be in business for a certain amount of time, with proof of creditworthiness.

Invoice Finance is designed to bridge the cash flow gap between you issuing an invoice to a customer and waiting anything from 30 to 90 days for that invoice to be paid.

With an Invoice Finance agreement, you get paid up to 90 per cent of the value of the invoice within 24 hours of it being issued. A second payment is usually made to you when the customer repays the invoice, less the finance service’s fee.

A financial services provider dealing in invoices will still want reassurance the business is creditworthy, but they take a whole raft of other criteria into account because ultimately the collateral is the invoice, and the risk of non-payment is extremely low.

Whatever product you choose really depends on why you want it. Invoice Finance works better when you are seeking to bridge a cash flow gap caused by waiting for customer payment. By getting access to customer payments faster, it means you can pay your employees on time, negotiate preferential rates with suppliers, or invest more into growing your business. There’s no need to dip into the business savings account or add to your overdraft.

Bank loans tend to work better if you’re buying assets for the business or have a large, one off payment, to make.


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Ease of applying for business loans vs Invoice Finance

Providers offering Invoice Finance solutions tend to be more interested in the creditworthiness of you and your customers – they will consider start-up businesses as well as those with bankruptcy in the past.

There is no need for you to provide assets because your invoices are your assets. You also receive reassurance because an Invoice Finance provider will do extensive credit checks on your customers before offering you an agreement. This means you have more information on the credit health of your customers allowing you to offer more favourable deals.

Qualifying for a bank loan is different. Organisations tend to set their own criteria with regards to credit scores, profitable books and qualifying assets to underwrite a loan. If you have a bankruptcy in the past, it is much more difficult to obtain a bank loan.

All financial services providers will wish to see documentary evidence of your business, looking for balance sheets, income statements, customer pipeline evidence, accounts and tax returns, as a means to making their decision. Invoice Finance organisations tend to work more quickly than those offering bank loans.

Alternative funding to support growth plans

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How fast are funds made available to you?

When you finance your invoices, once the agreement is up and running (taking a few days to organise), you receive payment usually within 24 hours of issuing your first invoice.    Bank loan applications can take many weeks to process and there is a real risk of rejection for many businesses. This can depend on a bank's approval criteria and the complexity of the deal.

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Differences in fees

Costs are variable depending on the anticipated number of invoices an invoice finance company will handle, over what time period. However, the more invoices you issue, the more cash you get access to faster. With a bank loan, if you want to add to the funding line, you’d need to renegotiate the deal which could take many more weeks. Typical APR on a bank loan will usually be a higher percentage than factoring contract fees.

In general, loans are best used to buy equipment, to support one-off projects or to purchase property.

Whatever you decide, make sure you choose a solution that does not add more burden than is necessary on your business.

Bibby Financial Services provides flexible, invoice finance solutions designed to bridge the cash flow gap in your business. Contact us for more information.

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