The struggle that businesses go through in order to secure finance can often be one which is detrimentally disruptive to the day-to-day running of a company.

When new opportunities present themselves, business builders need to be able to quickly access extra capital to fulfil new orders, purchase new equipment or hire the right people.

Invoice finance is an increasingly utilised funding mechanism – one which can very quickly, and securely, open up a line of credit for growth.

While once considered to be the lending option of last resort, the reluctance of banks to fund small or risky ventures has meant that businesses have begun to spend more time investigating how invoice finance can provide assistance.

However, a recent poll conducted by sister site SmallBusiness.co.uk revealed that a hefty 63 per cent of small businesses still do not know what invoice finance discounting is, while 21 per cent use it and 15 per cent do not.

Broadly speaking, commercial finance is split into three areas: factoring, invoice discounting and asset finance.

The unappealing aspect of factoring is that your clients know you’re using commercial finance to improve your cash flow, and the company chasing payment may be too zealous and forceful when dealing with clients you value. In many instances, the sophistication of credit control may be bluntly downgraded to debt collection.

This has given rise to invoice discounting. The service is similar to factoring except you can collect the debt by yourself so customers need never know you’re borrowing money. Furthermore, you control the relationship you have with clients.

Related: Factoring, discounting, selective invoice finance: what’s the difference?

For this feature we are examining invoice discounting, which we will refer to as invoice finance. The mechanism can be a big help when businesses are dealing with the lengthly payment terms often associated with big contracts. Netting that game-changing contract is great, but effectively useless if business builders don’t have the requisite capital up front to satisfy the order or service.

To find out how using invoice finance has benefitted British businesses, we’ve garnered advice and experiences from five businesses currently employing the funding option. These companies have told us what led up to the decision to use invoice finance, how the deal was put in place, and what it has subsequently allowed them to do.

1. Power Testing

Chris Park

We run a family specialist electrical contract business, which was initially set up by my father and his business partner back in the 1960s.

We’ve had some tough times, especially at the end of 2009, and have had to adapt to change our business model.

The business now does a lot of out of hours work for clients such as Thames Water and 90 per cent of Canary Wharf. This was so that we could build revenues and become a more reactive call-out company.

Power Testing started to use invoice financing about six years ago – a necessity to invest for a quick turnaround. Lots of our clients are on 60, 90 or 120 day payment terms, and we can’t sustain that with all the equipment needed to satisfy the contracts we have.

To get ourselves out of a difficult period of trading, and towards increasing revenues, we needed to take on bigger contracts – which ultimately are a large amount of capital outlay to start with.

Our biggest contract last year was worth £1.3 million, and we would never have been able to deal with that in our previous funding situation.

Since taking it on we’ve been able to quickly boost turnover from £1.8 million, through £3.6 million and £3.8 million, to £5.8 million last year. Our invoice finance provider has allowed us to double our limits so we haven’t had to slow down – the amount available has grown as we have, which is useful for us.

Our arrangement is that they leave our clients alone and let us deal with them as we have done before. As time has gone on we’ve been able to up our credit rating and opened up new avenues to draw down more and grow in turn.

In days gone by it was very much a case of using whatever overdraft facility we could gain access to, and then having the directors put additional working capital in.

The big plan in the coming few years is to buy our own building, which would be a big thing for all the staff at Power Testing. Already we know that we’ll be able to borrow against the ledger for things like that, which is great.

I would recommend any business to have a look at using invoice finance – find out what is on offer. In my experience it is not so much of a cost that you are loosing your margins. It is a bit of the unknown, and we were slightly pushed towards it by advisers, but in our situation we had to do it.

We’re now entering a bigger pond of operators in our space, with larger contracts. It’s going to be a bit more cut throat than we’re used to.

2. Evolution Foods

Mike Alexander

We deal with supermarkets on a day-to-day basis and they often have payment terms of 60 days.

That period is often extended by a couple of weeks so we are talking about hitting the 75-day mark before we get paid. This puts a lot of strain on a new and growing business, which is very seasonal in the way it operates.

Our busiest period is from August/September time right through to Christmas, so there is a big demand on cash flow at that time of the year.

Using invoice finance has been the only was for us to have a flexible enough credit line to deal with payment terms which are dictated to us.

We specialise in dried fruits and nuts and have about 200 products that we distribute now. The invoice finance arrangement we have in place is our main source of funding and has allowed us to invest a lot in machinery to help grow, which would not have been possible otherwise.

It’s a very easy system to operate: each time we have a new file we upload it and our account is updated to reflect it. If you know a bit about accounting it’s not difficult, and if you are confident that your customer will pay then it works.

Banks today are very rigid in the way they operate and, whilst we continue to maintain a relationship with our bank, it is at a low level. In all honesty we could change banks tomorrow, as we wouldn’t have to ask about lending.

Since starting to use invoice finance we have changed the terms of the agreement three times so that we can continue to grow. Last year we asked the question of whether we would ultimately out-grow the mechanism, but were told that we will be able to amend and extend it.

We are a growth company and would want to know in advance if we were going to have to look elsewhere for funding, but they are happy to keep supplying us – which is great for us.

For a business which does have to deal with slow payments this is the only way to have a finance line which is flexible enough. Before we were self-financed, but there is only so far that you can stretch that.

My advice would be to get out there and talk to invoice financiers. They are not like a typical bank and will help to find a solution that is flexible for you and the business.

I think if you go back 20 years it would have been something no one would have talked about but it is much less taboo theses days. No one is turning their nose up because you are talking about it. We don’t make a big show and dance about it but we also don’t hide it if people ask.

From a business which began life in 2006 inside a very small bedroom, we are growing rapidly using invoice finance to fuel our development.

3. Raconteur Media

Freddie Ossberg

My first experience of using invoice finance was through a partnership buy-out when I bought out my former business partner’s stake in the business.

Raconteur Media is a specialist media company which looks at different pertinent issues to create special reports that we then publish and distribute.

Personal savings were responsible for getting the company set up, a week before Lehman Brothers crashed actually, but failure wasn’t an option as we had put so much into it ourselves.

When I went out looking for finance I went absolutely everywhere for 2-3 months. From private equity, to venture capital right through to regular forms of finance like banks and then to business angel networks. It was a case of examining the whole network of opportunities, but then I discovered something interesting.

The majority of buy-outs which used to be financed by debt before the recession are now done using invoice finance, so that is why I ultimately looked at it after researching other options.

I knew the very basics of it. However, what I did do was spend a long time figuring out the exact mechanics of it in terms of it. I was very nervous at the time and really made a point of fully understanding all of the ins and outs or what it is like to run a company which has used invoice finance 18 months down the line.

We did an early viability study that was quite comprehensive, where we predicted the impact of taking out on invoice finance line. In the end we ended up plugging a cash shortage at a particular time of the year with an Enterprise Finance Guarantee loan to go with the invoice finance.

The process has been a big benefit to the company as it has meant that we’ve made our management accounting much more professional. It’s a case of being smarter now in the way we report.

In the previous set up it was just me, my business partner and an outsourced bookkeeper. We had a very basic set up and in dealing with an invoice finance provider and a credit facility we had to smarten up quite considerably our financial reporting – so that was the biggest shock to the system.

With lending in today’s climate, whether it is banks or other alternative forms of finance like crowdfunding, they don’t give you an of their 11 per cent loans without it being backed up by an asset – despite what they say.

Whereas in 2006-7 you might have been able to get finance on the profitability and strength of your balance sheet, and secure £500,000 over five years no problem on 5 per cent interest, that just isn’t possible these days.

I didn’t have any assets so my lending was done on a human approach rather than a numerical one. So I find that the focus on asset backing is not very good for small entrepreneurs.

I was very glad that my invoice finance provider took a different approach as it meant that I could get my dream scenario, but at the same time I felt that is was something that the company could afford over the next 2-3 years.

4. Data Duplication

Joe Jouhal

The business needed to pivot having spent much of its history duplicating data found on floppy disks, CDs and dongles.

Going back there was a demand for that, but this was starting to drop off so I came in and acquired the business. Having worked with the law enforcement sector when they needed data on a seized computer copied, we’ve transitioned the company into one which now offers hardware and software to that same market.

Our offering is targeted at the specialist computer forensic software segment. One project we’re involved with is trying to help create a national database of images so that we can help catch perpetrators involved in child pornography.

Before the existing owner had sold the company he’d been very focussed on that – consistent revenues but not much growth.

What I wanted was a vehicle to manage cash flow so that we could make investments and allow the founder to take cash out. It was about not lumbering the company with big loans.

I had no experience with invoice finance but was aware of it through old customers who had used it. My background is as a qualified accountant, but the methodology of invoice finance is very easy to understand once explained.

To date we’ve not overused our agreed line, what we have done is limited the amount of drawdowns to cover the cost of what we’re paying.

Using our invoice finance line we’re about to make an investment in a new CRM system which is great. Once the system is in place it is easy to manage and see how much you are able to draw down. As a business, we know what we have to pay back at any time.

My advice would be to be sensible about how it is used. It’s like having a credit card, you have to be sensible. Just because you have a £5,000 limit you still have to pay it off.

The invoice finance was to help with cash flow and fund items that we needed to put in which were small capital investments. Whereas a loan is a fixed amount which I might not even use all of, using our invoices is great to fund small investments in things like people and technology. It may cost a bit more but the flexibility makes it worth it.

You need to have a proper business plan and mechanism for forecasting so you have a view of peaks and troughs when cash flow will be easy or hard. We did a lot of work up front and will soon go back to that to revisit it.

Going forward, I would definitely look at an invoice finance and loan combination again. Invoice finance gives me flexibility but if we were to do something big like buy our own premises then it would probably make sense to do that through a big loan.

5. Dawn Prints

Alan Jackson

Like most businesses, we’ve had our ups and downs over the years. At one stage we employed around 30 people, but it’s about 14 right now.

However, looking back to just over a year ago, we were going less than half the £1 million turnover we’re posting now.

At that stage the business, which is a 33 year-old printed products enterprise, was just bobbing along and needed some investment. We have equipment to produce a wide range of print products such as business forms and colour promotional material, but needed to upgrade.

I started where most in my situation would be by going to the bank and saying ‘please sir’ – but in this climate they just said no. I’d had a wonderful relationship with my bank for 16-odd years, but no one was really lending.

At that stage we turned towards invoice finance. I’d heard bad reports about it over the years, and back in the day it had a less than savoury reputation. People in our trade who’d tried it thought they were rich. Then they’d go and spend it and end up being broke.

So there was a bit of a fear factor when Dawn Print decided to start using it. For that reason we decided to use confidential invoice discounting [where customers are not aware of the funding mechanism being used], but eventually clients figure it out.

There were a couple of limitations that were outlined to us when we first went in looking to get a credit line. Thinks like more than 30-40 per cent of your ledger can’t just be from one customer. Luckily for us we have a big spread of customers and deal with businesses like Adidas.

Through invoice finance we’ve been able to invest £250,000, but increase turnover by double that figure. It was all about moving us into the colour printing market. We have a leasing agreement for our new equipment, which we pay back over time.

At the end of the day our invoice finance agreement is a very simple thing to do, the repayment just comes out as a standard direct debit.

One thing you have to realise though is that when somebody says you can have 80 per cent of your sales on day one, a lot of that is owed here there and everywhere. It is wrong to think you are rich.

I would happily use it in the long term as when we get through the next two years there will be lots of funds slushing around in it. If you are sensible you can steadily build up capital.

We wouldn’t be sitting where we are right now without the invoice finance line. If the business banking environment improved down the line I would have to look into that situation, but right now it is a case of so far so good.

See also: The benefits of invoice finance