If you are considering using invoice finance (which includes both factoring and invoice discounting services) you should read this article first as it summarises the last 5 years worth of research that we have conducted regarding the sector. Below I have distilled all the results into the key information that anyone considering using such products, needs to know.
Invoice finance is not used by an enormous number of businesses within the UK, but it is used extensively by fast growing businesses. We have estimated that about 0.86% of all UK businesses currently use these products, compared with the vast majority of businesses that will use some combination of overdraft, loan or family money to fund their venture. There are a number of reasons for this. Approximately 25% of businesses are likely to be eligible (higher if you include retailers for who there are now specialist funding products). Eligibility is generally linked to trade of the business. Those which sell goods or services that are “sell and forget” are most suited, and the sales have to be to other businesses, on credit terms. So if you factored that in, one might estimate the market penetration to be around 4% of eligible businesses.
There are two key reasons for the low number currently using these services. Awareness of these products is extremely low amongst UK companies. Our studies have repeatedly found that one of the key issues for this sector is that businesses do not know about, or understand these products. The other reason is price. Businesses tend to expect that these services will be much more expensive than they actually are. Often they do not have access to the whole market so are unable to compare the deals that are available across the broad range of providers that serve this sector. Also, when determining value for money, the benefits from services such as factoring, which includes outsourced invoice collections and credit control, needs to be factored in.
Turning to the fast growing businesses, we conducted a study that found 12% of businesses that were growing their turnover by 20%, or more, per annum, were using invoice finance. The concentration was even higher amongst those that said they could not grow any faster than they were already. 52% of those “maximum growth” companies told our study that they were using these services. The reason for this is that as the turnover of the company grows so the level of finance grows in line with the business.
We have studied new startups and found that only 2% were using these services. In most cases they either didn’t know about these products or assumed that new startups would not qualify, which is incorrect. There are specialist services designed for new start ups.
These are a few of our other key findings that have arisen from studies of existing invoice finance users:
- 98% of existing users told us that they would recommend invoice finance.
- On average a business will use these products for 5.28 years during which time they will normally change provider once, in 42% of cases to improve on price.
- The cheapest invoice finance company varies according to product and the circumstances of a particular prospective user (we have studied this using mystery shopping techniques).
- Customer satisfaction levels, according to our independent research, tend to be 45% higher where an independent receivables financier is used as opposed to a bank offering these services. Despite this, 51% of users that we surveyed, said they had found their way to these services through their bank.
- FundInvoice have been able to save 4 out of 5 businesses money on prices quoted elsewhere. On average they have saved clients 37% of their invoice finance costs.