Invoice finance

Using unpaid invoices as security, to gain quick access to a percentage of their value.

Invoice finance is when the lender uses an unpaid invoice as security for funding, giving you quick access to a percentage of that invoice’s value quickly, sometimes within 24 hours.

The amount of money a provider will lend you is based on its own risk criteria.

But this method of funding lets you access finance for cashflow or investment purposes, using an often-untapped asset on your balance sheet.

There are two main types of invoice finance:

 

Invoice factoring

This 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.

It will then deduct the costs of the factoring service, before paying you the remaining balance.

Some of the characteristics of invoice factoring include:

  • being generally easier for smaller businesses to secure
  • the factoring provider credit checking potential customers
  • customers are likely to know that your business is using an invoice factoring provider.

Invoice discounting

This works in a similar way to factoring, but your business keeps control of customer payments.

You pay a fee and a discount charge (like interest) if you use the funding, much like a standard overdraft.

Unlike invoice factoring, with invoice discounting your finance provider will not credit check your customers, this also means that your customers may not be aware that you are making use of invoice finance.

You will also retain responsibility for ensuring your customers pay on time.

In general, invoice discounting is more often used by more established businesses with larger turnovers.

Other types of invoice finance

In addition to invoice factoring and invoice discounting, there are a number of other types of invoice finance available to smaller businesses.

Selective invoice financing provides you with the flexibility to finance selected customer accounts, whereas spot factoring gives you the option to finance distinct invoices.

These methods differ from factoring and discounting as they are not comprehensive solutions; they offer you the choice of determining which invoices to finance while managing the remaining ones in a typical manner.

Understanding which type of invoice financing will work best for your business depends on your business's size, current situation, requirements, preferences, and objectives.

There are lots of different invoice finance providers in the UK, ranging from specialist invoice finance companies to banks and other financial institutions.

An invoice financing company typically provides up to 90% of the invoice value upfront.

Once the customer pays the invoice, the remaining amount is released by the financing company, after deducting any applicable service fees.

These companies offer a niche financial service which enables businesses to unlock immediate funds from their pending invoices.

Rather than waiting for customers to pay their bills, a business can sell these outstanding invoices to an invoice financing company for a certain fee.

This arrangement allows the business to gain instant cash flow, which can be crucial for handling daily operations, payroll, and other costs.

Depending on the type of invoice finance, the responsibility of collecting payment from the debtor then shifts to the invoice financing company.

As with all financial products, there are a number of eligibility criteria you will have to meet to make use of invoice finance.

 

Are you an established business with a trading history?

A lender will ask you to prove that you issue invoices to customers, as assurance that they will get paid.

 

Are you looking for less than £1 million?

There’s no minimum threshold for invoice finance.

But if you need more than £1 million, other finance solutions may be more suitable for your business.

 

Do your customers pay invoices within 30 to 90 days of you issuing them?

If it takes longer than 90 days for customers to pay your invoices, invoice finance providers may not approve your application.

This is because they would have to wait too long to receive the money they’ve lent you.

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?

The lender needs to detail your trading history clearly and accurately, so will review your financial statements.

 

Do your customers have a good record of paying bills?

Invoice finance providers will also review your customers and their paying habits, and look for those 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 with others (known as business-to-business, or B2B).

A lender won’t necessarily turn you down if your customers don’t fall within this bracket, but may offer you less finance as a result.

Utilising invoice finance, like all funding options, comes with its own set of benefits and drawbacks.

Here are some significant advantages:

 

Maximising your assets

By using unpaid invoices as collateral for the loan, a business is able to capitalise on an often unused asset on its balance sheet.

 

Asset Protection

The unpaid invoices serve as collateral for the loan, eliminating the need for additional security, thus protecting your assets.

 

Flexibility

There are rarely any controls on how you spend the facility from invoice finance, giving your business flexibility in terms of how the proceeds are spent, be that on more inventory, staffing, or another element of the business’s activities.

 

Quick Accessibility

Unlike traditional bank loans that may require an extended approval period, invoice financing can provide funds within 24 hours.

 

Scalability

As your business turnover grows, you can access more funds, thereby continually enhancing your business cash flow.

 

Improving cash flow

As funds are often available quickly and can scale with your business, invoice finance can often keep cash flow healthy.

 

Efficiency

Invoice financing expedites the business invoicing process.

Companies that provide invoice factoring essentially function as credit controllers too, freeing up more of your time to concentrate on your business growth.

 

Retaining equity

Since invoice finance is a debt product you won’t have to give away equity when raising finance for your business.

While invoice financing offers several advantages, it is important to be aware of potential drawbacks as a business owner.

These include:

 

Customer dependence

Depending on the terms set by your lender, you may be held responsible if your client fails to settle their invoice.

 

Immediate expenses

Utilising these services often involves payment of associated fees.

 

Privacy concerns

In the case of invoice factoring, the credit control process is handled externally.

This could potentially influence how your clients view your business.

However, this issue does not arise with invoice discounting.

 

Long-term costs

If you opt for invoice factoring, you must take into account the interest rates and processing fees levied by lenders.

 

Potential to affect your credit report

Invoice finance providers will conduct credit checks when you apply for finance.

These checks could have an impact on your credit report.

You can search for invoice finance providers online or alternatively, view invoice finance providers for the Recovery Loan Scheme (RLS)Link opens in a new window on the British Business Bank website.

Before you get going, use this checklist to help decide whether invoice finance is suitable for your business.

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Making business finance work for you

Making business finance work for you

Starting a business doesn’t come with a set of instructions.

We know that understanding the many different types of financial product in the marketplace can be difficult.

Our Making business finance work for you guide is designed to help you make an informed choice about accessing the right type of finance for you and your business.