As global factors continue creating economic pressure, the need for trade finance remains crucial for SMEs. According to the World Bank, the gap in international trade credit amounts to $3tn and is widening all the time. As a result, it’s likely that many businesses will be attracted to or pushed toward invoice finance as a lifeline. In this article, we weigh it up as an option.

What is invoice finance?  Invoice finance is a secured banking product in which a business borrows money based on the quality of its debtors, the clients they sell to, and the invoices they’re owed. In other words, lenders are counting on a borrower’s clients to pay their bills (and by extension, the loan) if the borrower can’t. Some lenders will also use a credit insurer to guarantee invoices, which gives them more scope to increase the facility.

What are the benefits? Invoice finance is one of the easiest ways for businesses to borrow money, specifically, large amounts. For small businesses it might be the only possible option. Because invoice finance is relatively low risk for lenders, it can be one of the cheapest financing options available (low risk means low interest rates).

What are the disadvantages? Though invoice finance can be the right option for some businesses, it can be restrictive. These are some of the factors that make it hard: 

• Timing: because invoice finance hinges on the amount of sales a business has completed and invoiced for, it isn’t going to help if cash is needed upfront to purchase goods before the sales are made. 

• Process: though interest rates for invoice finance are low, the process can be cumbersome and time consuming to work through. It’s laden with more hidden costs and admin (like completing audits and submitting ledgers) than most working capital loans.

• Communication: businesses using invoice finance sometimes have to let their customers know that they are doing this, which might not be in their interest. Suddenly, these businesses are vulnerable to clients who, aware of the power this new information gives them, can use it to bargain hard on price.

• Planning: it can be hard to plan when lenders are looking to borrowers’ clients and insurers to assure loan repayments. Lenders can disallow funding based on debtors they think of as ‘poor quality’, which can result in fluctuations in the amount of money lent.

If your business uses invoice finance, and some of these restraints sound familiar, you might want to consider a more flexible alternative that is easier to plan around. Revolving credit facilities like ours could be a better option, especially when it comes to managing cash flow, as invoices aren’t required. 

Get in touch with us here if you would like to find out more about Beacon’s revolving credit facility.