Invoice Financing: What Happens If You Can’t Pay

Invoice Financing (also known as invoice discounting) is a method of financing that allows businesses to use unpaid invoices as security for finance. Providers of invoice financing will usually agree to give a percentage of the invoices’ value as loans.

Invoice financing is slightly different from invoice factoring as financing allows your business to collect money owed and is confidential. Factoring involves another company taking over your sales ledger and collecting on your behalf.

It is one of the quickest and easiest ways to access finance, especially for companies that rely on large cash flow to keep going. However, it is also one of the riskiest forms of debt due to its reliance on your debtors to pay invoices on time. These risks are rarely explained properly before finance is given. If you are thinking about using invoice financing or are struggling to keep up with an agreement, it is important that you know what you’re getting into.

Why should you avoid invoice financing?

1. Tight payment schedules

The agreement is based on the value of unpaid invoices, essentially providing an advance on money that you have not been paid yet. This often seems attractive if you are in a tight spot in terms of cash. However, to pay this off, your debtors will need to pay exactly on time. Any delay could result in delayed payments to your lender and, this could be recorded as a default, which will in turn result in recovery action against your business and potentially you.

2. Interest payments

No finance agreement would be complete without high interest rates. Invoice financing agreements can vary from 1% to 10% interest, this means as well as ensuring invoices are paid on time, you can end up paying much more than you borrowed. Missed/late payments will also result in additional fees and other charges that will accrue over time.

3. Personal Guarantees

Due to the nature of this lending, it is very likely that lenders will require directors to sign personal guarantees for any money borrowed. Ultimately, this means if the company defaults, the directors will remain personally responsible for paying the loan back.

Failure to do so will often result in the repossession of assets and even personal bankruptcy.

The Vicious Cycle

Invoice financing agreements often start out as a way to bridge a small gap or cover an unexpected expense. The real danger here is that you could end up trapped in a cycle of trying to pay financing companies whilst struggling to maintain day-to-day expenses. This inevitably leads to more and more borrowing to continue covering this.

Often, the use of short-term finance is a key indicator of a more serious issue within the business. At this stage, your best option is to consult business experts before you decide on your next move.

Your Options

As mentioned above, the best option here is to consult specialists who can advise you on which route is best for your business. More importantly, the right advice can make the difference between business recovery and directors facing financial ruin.

Bell & Company have been helping directors across the UK for over a decade. Our varied and experienced team can help with any business debt issue. We protect directors by limiting their personal exposure and protecting their assets.

 Call us on 0333 305 4331 for a free confidential case review.