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What's right for my business: invoice finance or a loan?

Kriya Team
November 15, 2021
min read
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These are the main differences between invoice finance and loans to help you choose the right kind of finance for your business

Businesses need cash to grow. That’s something founders and CEOs know all too well – even (or especially) when business is picking up. Lots of organisations turn to external finance not only to keep the wheels turning, but also to make necessary improvements or fund new strategies. Whatever the reason, the right funding can propel your business to new heights.

With so many options out there, it can be hard to know what kind of finance is right for your business and the ambitions you have for it. A facility that works perfectly for a competitor won’t necessarily work for you too. The key to deciding what to apply for is understanding the factors that contribute to needing funds in the first place, and what you want to use them for.

Two common kinds of business finance are loans and invoice finance. We’ll walk you through the main reasons a business might take on one or the other, and the kinds of organisations they work best for.

Is invoice finance right for my business?

If you’re a business that sells to other businesses then you’ll be no stranger to the gap between invoicing for work or goods and actually receiving payment. In an ideal world, you’d write an invoice and it would be due and settled that day. However, the reality is that it often takes 30, 60 or even 90 days for your clients or customers to pay.

Invoice finance is a useful financial tool that helps to bridge that payment gap. An easy way to understand invoice finance is if you think of your invoices as an asset. They represent money that will be coming into your business. What invoice finance allows you to do is tap into their value when you want to. Essentially, an invoice finance facility offers you an advance against your existing unpaid invoices. Typically you get 90% of the cash you’re owed immediately and pay a small fee to the provider.

Invoice finance unlocks your cash flow, fast forwarding the funds you’re owed. We go into more detail about the technicalities of how it works in this article, but at MarketFinance we offer two kinds of invoice finance:

  • Pay-as-you-go – this allows you to decide which invoices you want to get the cash out of. It’s handy for one-off or seasonal use. It’s a flexible option to help you get quick and easy access to funds.
  • Subscription – this option is more cost-effective if you want to fund more invoices regularly. You pay a fixed monthly fee to use the facility and can access the cash tied up in as many invoices as you like.

So what can you use an invoice facility for? Our customers have a variety of funding needs, but the most common costs they use their facilities to manage are:

  • Staff wages – their teams get paid on time, every time
  • Negotiating better rates with suppliers – invoice finance ensures a business has the funds to cover its own payments. When it comes to suppliers, that extra financial firepower provides the opportunity to negotiate purchases based on scale and payment terms. It’s something that could be particularly valuable with recent supplier price increases as a result of the pandemic and Brexit
  • Offering better credit terms for customers – businesses that don’t rely on customers paying up to access the cash they’re owed can make themselves more attractive in the market. Giving customers longer payment terms to help them manage their own cash flow incentivises them to use you, and won’t have the same affect on your own cash flow
  • Managing seasonal demand – for businesses that have busier periods, having the cash on hand to purchase extra stock in anticipation is really useful. It also helps manage quieter moments when there are fewer incomings
  • One-off and unexpected costs – a surprise bill doesn’t have to be a disaster. Having a facility in place to dip into helps you cover the cost and won’t keep you up at night
  • Taking on new business – the right facility will let you take on a new contract and cover the upfront costs, meaning there’s less difficult onboarding new clients

Since invoice finance is based on the value of the invoices a business issues, it’s only suitable for those that sell to other businesses. If you run a B2B then it’s a very useful tool to boost your working capital and get control over your finances because you know exactly when you’ll get paid.

Should I take on a business loan?

A traditional business loan is probably the best known kind of finance. It’s an instant cash injection that sets you up with a significant amount of cash up front. At MarketFinance we’re currently accredited for the government-backed Recovery Loan Scheme (RLS). Businesses that have been affected by the pandemic can apply for a loan to help them recover stronger. It’s perfect for businesses that are getting back on their feet and have ambitious plans for the future.

A MarketFinance RLS loan offers businesses:

  • £50,000 - £350,000 to support your business over 4, 5 or 6 year terms
  • Six months of interest-only payments, so you’ll only start repaying the principal after this period is up
  • Competitive interest rates and an arrangement fee capped at 4%
  • No personal guarantee needed for loans up to £250,000

Find out more about RLS and how to apply here.

If you’re looking for a smaller or more flexible loan, a flex loan could be the perfect fit. Similar to a credit card or overdraft, you can access the cash in a flex loan over and over again. We think of it as working capital on demand. At MarketFinance we’re offering flex loans between £5,000 and £100,000. You can choose to access the whole flex loan at once, or withdraw smaller amounts as and when your business needs the extra cash.

The flexible nature of a flex loan also comes into its terms. You can choose the repayment schedule that works best for your business and your available balance will automatically adjust depending on how much you’ve already withdrawn and repaid. And crucially, you only pay for the funds you actually use.

Our customers use their flex loans for variety of different reasons, but here are a few of the most common:

  • Purchasing stock – peaks in demand, one-off stock purchases and ambitious large orders are easy to cover when you can dip into the cash you need
  • Moving to new premises – if business is growing and you need more space for your team or products then a flex loan can help you get settled
  • Upgrading equipment – if you're modernising or making improvements then you might have some one-off costs to cover. A flex loan helps you make these without forcing you to compromise on your regular outgoings
  • Keeping up on staff and operational costs – if you need to hire extra hands or simply feel confident that you can always make rent or wage bills, a flex loan is there as some extra support

You can learn more about how it works and how to apply here.

How do I decide?

There’s a whole host of funding options available for businesses today. The best way to decide what your business needs is to be on top of all your incomings and outgoings. Once you understand your cash flow or working capital cycle and where your cash is going you can think about how to boost it.

In short, invoice finance is designed for B2B businesses that want to bridge the gap between invoicing for work and getting paid. It’s a great way to manage your day-to-day costs by taking the stress out of waiting for payments. A traditional business loan on the other hand is better suited to businesses that require a larger lump sum of funding. These are paid back over a number of years and can help you fund a larger business change or ambitious plans. Finally, a flex loan sits somewhere in between. You don’t need to be a B2B customer, but you can also decide to take on a smaller amount of debt. It’s the ideal solution to top up the funds your business needs as and when you need to.

If you’re still debating what’s right for your business then the best thing to do is to talk to a provider or broker directly. Alternatively, our eligibility checker can help point you in the right direction before you pick up the phone. It’s free, no-commitment and will give you tailored advice for your business in just a couple of clicks.

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