Invoice Finance

Invoice finance allows businesses to use unpaid invoices as collateral. Once an invoice finance facility has been set up, business can access funds quickly, often within 24 hours.

Invoice finance can be a viable solution when other lending options are unavailable or insufficient. 

How does invoice finance work?

Businesses assign (sell) customer invoices to the finance provider, leveraging them to create a dynamic funding pool that grows as new invoices are issued and paid.

Providers typically advance 80-90% of the invoice value initially, with the remaining balance (minus fees) released once customers pay. Costs typically include a service fee (a percentage of invoice value) and a discount charge (similar to interest) on utilised funds.

There are two types of invoice finance:

• Invoice factoring provides up to 90% of invoice value. The provider handles the management of the sales ledger and payment collection directly from customers. Invoice factoring can often be easier for smaller businesses with sales under £2m to secure. Customers are aware of factoring arrangements.
• Invoice discounting involves advances of up to 90% of the value of the invoice without involving sales ledger management. Invoice discounting is more common for established businesses with higher turnover, though increasingly available to smaller businesses. Service fees are lower compared to factoring.
  

What are the benefits?

Invoice finance has several potential benefits for a business, including:

• asset maximisation: businesses can leverage their unpaid invoices as collateral to secure funding. This allows them to tap into a valuable, yet often overlooked, asset on their balance sheet
• asset protection: unpaid invoices act as the primary security for the funding facility (technically they are sold to the funder). This reduces the need for other types of collateral, helping to safeguard your other assets
• flexibility: funds obtained through invoice finance provide businesses with significant flexibility, as there are typically no strict rules on how the money can be used
• speed: setting up an invoice finance facility may take some time initially, similar to traditional bank loans. However, once established, business can access funds quickly, often within 24 hours
• scalability: the facility grows alongside your business, removing the need to arrange new financing when you acquire major new customers or expand your operations.

What are the potential drawbacks?

Invoice finance also has a number of potential drawbacks that businesses need to be aware of, including:

• administration: invoice finance demands more ongoing involvement from the client. Due to this, invoice finance providers typically require clients to commit to an agreement for a minimum period, offering stability for both parties
• customer dependence: depending on the conditions outlined by your funder, you are likely to be liable if your customer does not pay their invoice
• privacy concerns: with invoice factoring, the credit control process is managed by the finance provider which may affect how your clients perceive your business. Invoice discounting operates on an undisclosed basis (provided that the business/facility does not run into difficulties), meaning your clients are unlikely to know about it
• costs: when considering invoice finance, it is crucial to fully understand the associated costs. This includes evaluating the discount charges and processing fees charged by lenders, as well as being clear on your responsibilities outlined in the finance agreement
• credit report: when applying for invoice finance, it is standard procedure for providers to perform credit checks. These checks could have an impact on your credit rating.

How do I access invoice finance?

You can search and compare suitable providers online or contact specialist finance brokers.