Invoice Finance - Invoice Discounting and Factoring - are types of finance that allow businesses to use their invoices and accounts receivable as security for funding.
Late payments are a problem for almost one third of SMEs
Key requirement
You need detailed and accurate accounts covering your financial and trading history.
Key benefit
Invoice Finance allows you to capitalise on an untapped asset on your balance sheet.
Key consideration
Do your customers have a good record of paying bills?
What is Invoice Finance?
Invoice Finance providers use unpaid invoices as security for funding and approved businesses can access a percentage of an invoice’s value quickly, sometimes within 24 hours.
The amount of funding given is based on the risk criteria of the Invoice Finance provider, but it allows businesses to access finance for cashflow or investment purposes using an often-untapped asset on its balance sheet.
Invoice Finance is growing in popularity among UK SMEs, particularly those with long cash collection cycles like manufacturing, retail and transport.There are two main types of Invoice Finance:
- Factoring Factoring allows businesses to generate money against unpaid invoices. The finance provider will lend you up to 90% of the value of your invoices. It will also manage your sales ledger and collect payment for your invoices direct from your customers. They will then deduct the costs of the factoring service, before paying you the remaining balance.
- Invoice Discounting Invoice Discounting works in a similar way to Factoring but the business keeps control of customer payments. Your business pays a fee and a 'discount charge' (similar to interest) if the funding is used, in a similar way to a standard Overdraft.
More than 40,000 SMEs use Invoice Finance and Asset-Based Lending in the UK
UK Finance Quarterly Statistics
Who’s involved in Invoice Finance?
There are lots of different Invoice Finance providers in the UK, ranging from specialist Invoice Finance companies to banks and financial institutions.
Am I eligible for Invoice Finance?
- Are you an established business with a trading history?You need a trading history to prove your invoice capability. A lender will ask you to prove you issue invoices to customers and they get paid.
- Are you looking for less than £1m?There’s no minimum threshold for Invoice Finance but if you require more than £1m there may be alternative or additional solutions that could be more suitable for your business.
- Are your invoices paid within 30 to 90 days of being issued?If your invoices take longer than 90 days to be paid, Invoice Finance providers may not approve your application as they would have to wait too long for their money to be repaid. It’s worth speaking to a few lenders as each will have different terms.
- Do you have detailed and accurate financial statements covering your trading history?Your financial statements will be reviewed by Invoice Finance providers. They need to detail your trading history clearly and accurately.
- Do your customers have a good record of paying bills?
Your customers and their paying habits will be reviewed by Invoice Finance providers. Ideally, they’ll look for customers who pay invoices on time and have a strong credit rating.
- Do you provide goods or services to other businesses?Invoice Finance is normally only available to businesses that trade business-to-business (B2B).
You won’t necessarily be turned down if your customers don’t fall within this bracket but the amount of finance you receive could be affected.
Benefits of Invoice Finance
Capitalise on an often-unused asset on your balance sheet
Improve cashflow
Access finance quickly
Flexible in terms of how you can spend the facility
You don’t have to give away equity
Risks of Invoice Finance
Your credit report
Invoice Finance providers will conduct credit checks when you apply for finance. Credit checks may affect your credit report.
Non-payment
Depending on your agreement with the Invoice Finance provider, you may be held accountable for unpaid invoices by your customer.
Fees
Invoice Finance providers will charge fees depending on the service you require.
Need to know / Checklist
- What are the margin and fees for the facility?
- How long is the agreement?
Is Invoice Finance right for you?
About your business | ||
| Business stage | Any but must have invoices | |
| Annual turnover | Any | |
| Sectors | Any | |
| Regions | Any | |
