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In the last few years more people than ever are leaving the safety of their careers for the excitement and challenge of being their own boss.

However many start-up businesses are keen to get an investor on board in order to get the capital they need to grow, when in fact they may easily be able to secure another form of finance that is less costly, in terms of both cash-flow and equity.

Before deciding to give away any amount of equity in your fledgling business, it is wise to explore all the other financial routes thoroughly. Whatever type of finance you go for should be considered against how you intend to use the money.

If your problems stem from being unable to pay for such things as suppliers, overheads or staff, then there are a few finance options that will solve cash flow issues. These types of finance are also used by many businesses for facilitating growth; management buy-outs; management buy-ins; and other activities that require a fast and large cash injection.

Invoice finance is one of these options, which can be taken up if your business takes payment via invoicing rather than by receiving cash up front. A Factoring or Invoice Discounting facility (types of invoice finance) will help you to manage your cash flow over a long period of time, in addition to providing a fast way of generating a large sums of money. By comparison a business overdraft or loan wouldn't offer the same stability as it is simply a one-off cash injection.

With invoice finance you are effectively borrowing against funds which you are already owed, so the risk-factor is considerably reduced – especially if as part of your facility you take out cover against a client defaulting on an invoice.

How does invoice finance help your business?

An invoice finance facility can be set up quickly, so that there is no time-consuming, uncertain application process as with taking out a loan. If your invoices tend to be for large amounts, you could use the cash advance (usually up to 90% of the invoice total) to grow your business as well as to cover the day-to-day running of it. Even if your sales ledger is smaller, the regular cash in-flow will enable you to plan ahead more effectively and to better manage your debt.

The type of finance known as Factoring also gives you the option of handing over your sales ledger to be managed by the lender. This has the benefit of giving you more time to spend on other areas of your business, and takes away the worry of chasing late paying clients.

How does invoice finance work?

There are two types of invoice finance: Factoring, which can be used by all businesses whether they are start-ups looking for a cash flow management solution or established companies looking for finance with which to grow their business; and Invoice Discounting, which is a similar product but usually used by larger companies.

Factoring

A factoring company will advance you a fixed percentage of the money owed to you from your outstanding invoices. Once in place the facility enables you to get your invoices paid quickly, sometimes within 24 hours of issuing them. In return you pay the factoring company a service fee plus interest on the loan amount for as long as the invoice is outstanding.

If you choose, you can hand over your entire sales ledger to be managed by the factoring company.

Invoice Discounting

Invoice Discounting is a similar service, which is aimed more towards larger established businesses, as it allows them to keep control of their sales ledger while still benefiting from increasing their working capital.

The invoice discounting company does not disclose to your customers that you are using the service, allowing you to keep greater control of your client relationships. The service can also be linked to lending against other assets, such as stock, machinery and property.

Finding out more about invoice finance

The quality of invoice finance facilities varies widely and it can be difficult to find impartial advice. Many businesses use their business bank as this seems like the most convenient and secure option, however banks do not always give the best deals.

In the first instance, you should aim to find out which would be the best type of invoice finance for your business and which companies offer the best fit in terms of service and price.

An independent broker such as Simply Business offers free, confidential consultations with highly experienced advisors. If you decided to take up one of the facilities offered, they would guide you through every step of the process and even be available afterwards to answer any ongoing questions or address issues.

You can find out more about Factoring and Invoice Discounting on the Simply Business website, call 0800 072 6030 to speak to a consultant or get instant quotes online.

This article was first published on Simply Business.