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.