A Brief Guide to Invoice Finance for Start-Ups

Running a start-up offers many opportunities but also challenges, with many stats often used to show how hard it can be to turn your new company into a success. Often it is financial problems that see start-ups fail before they can get going, which is why it’s so important to make sure you have enough starting capital and a solid plan in place.

According to research, 82% of small businesses fail due to cash flow problems, which is where invoice finance can help.

Invoice finance

What is Invoice Finance?

Invoice finance is the term used to cover two different types of lending: invoice discounting and factoring. Essentially, they allow businesses to unlock the cash tied up in invoices they are waiting to be paid by clients, by selling these invoices to a third party. There are a few small differences between the two.

  • Invoice discounting: The business receives the money owed up front from a third party, must chase the client who will pay the firm directly, who then pays the third party. This way clients are unaware that invoice finance services are being used.
  • Invoice factoring: The third party invoice finance provider provides the money owed but then they chase clients for payment of their invoices, so customers are aware of the arrangement.

How Can it Help Start-Ups?

For start-ups, using invoice finance solutions from the likes of Touch Financial can help smooth out your cash flow. This can be a real problem for new businesses when they are waiting for client payments that can take up to a month or more to receive. Waiting for the money to arrive and with limited capital means growth can be slow and restricted, whereas with invoice finance you have access to the money owed to reinvest in a timely fashion.

Are There Any Downsides?

There are costs involved with invoice finance, as the third party will take a cut once an invoice has been paid. Plus, with invoice factoring, if your clients know you are using such a service it can impact on their perception of your business. Becoming dependent on invoice finance can create operation and sales problems in the long run, so it’s best to limit use.

What Are the Other Alternatives?

Failure due to poor cash flow is one option. Otherwise, you may have to slow down growth while you wait for invoice payments or seek out other lending methods such as a business loan. This can come with higher interest rates and still take time to process though, which is less than ideal.

For start-ups, invoice finance can provide a helping hand in the early days to enable a smooth cash flow and avoid one of the main reasons others fail.