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Get paid faster with invoice finance

Borrow against unpaid customer invoices to maintain cashflow for your business

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Author
Salman Haqqi
Editor
Lucinda O'Brien
Last updated
September 11th, 2024

What is invoice finance?

Invoice finance is a way for businesses to release cash tied up in unpaid invoices for products or services they've provided. Instead of waiting for customers to settle their bills, businesses can partner with a finance provider, which advances a large portion of the outstanding invoice's value — often between 70% to 90%. This allows businesses to maintain a healthy cash flow, ensuring they have funds when needed, without having to wait for their clients to pay their invoices.

How does it work?

Imagine you have an invoice that's due in 60 days. Rather than waiting, you can approach an invoice finance provider, known as a factor. They will assess the invoice, and if approved, provide you with up to 90% of its value. Once the customer pays the invoice, you receive the remaining balance, minus any fees. Here’s a fictional example:

Meet Emily's Web Design Studio

Emily runs a web design studio in Manchester. She works with various clients, and while the business is thriving, she often faces cash flow challenges because many of her clients take 30 to 60 days to pay their invoices.

In July, Emily completed a project for a major client, and she invoiced them £10,000, payable in 60 days. However, she needs some of that money now to pay her team, handle operational costs, and invest in a new software tool.

Emily approaches an invoice finance provider, who assesses the invoice's credibility and her client's reliability.

The provider offers Emily 85% of the invoice value upfront. So, she receives £8,500 immediately. This injection of cash allows her to meet her immediate expenses without waiting for the client to pay.

Two months later, Emily's client pays the full invoice amount (£10,000) to the invoice finance provider. The provider then gives her the remaining 15% (£1,500) but deducts a fee for their service, let's say £200.

So, Emily receives an additional £1,300, making her total £9,800 out of the £10,000 invoice, after the fee. The invoice finance provider keeps their service fee, and the transaction is complete.

What are the different types of invoice financing?

Factoring

Factoring is a type of invoice finance where your business can sell outstanding invoices to a third-party company, known as a "factor."

In exchange, the factor gives your business an immediate cash advance, typically between 70% to 90% of the invoice's total value. So, instead of waiting for your customers to pay, you get a good chunk of that money straight away.

The factor also takes on the role of collecting the money owed on those invoices from your customers. Once they succeed in collecting the full amount, they'll send you the remaining balance, minus their fees.

Invoice discounting

Invoice discounting is a special type of invoice finance. With invoice discounting, you don't have to wait for your customers to pay. Instead, you collaborate with a finance provider who lends you a significant portion of that invoice's value right away, often between 70% to 90%. It's like having a financial safety net giving you a boost when you need it.

Where it’s different from factoring, is that even though you've received an advance, you're still in charge of collecting the payments from your customers. The process remains confidential, so your clients aren't aware of this arrangement.

Once your customer pays up, you then repay the finance provider the amount they advanced you, plus any associated fee.

What are the different types of invoice financing?

Factoring

Factoring is a type of invoice finance where your business can sell outstanding invoices to a third-party company, known as a "factor."

In exchange, the factor gives your business an immediate cash advance, typically between 70% to 90% of the invoice's total value. So, instead of waiting for your customers to pay, you get a good chunk of that money straight away.

The factor also takes on the role of collecting the money owed on those invoices from your customers. Once they succeed in collecting the full amount, they'll send you the remaining balance, minus their fees.

Invoice discounting

Invoice discounting is a special type of invoice finance. With invoice discounting, you don't have to wait for your customers to pay. Instead, you collaborate with a finance provider who lends you a significant portion of that invoice's value right away, often between 70% to 90%. It's like having a financial safety net giving you a boost when you need it.

Where it’s different from factoring, is that even though you've received an advance, you're still in charge of collecting the payments from your customers. The process remains confidential, so your clients aren't aware of this arrangement.

Once your customer pays up, you then repay the finance provider the amount they advanced you, plus any associated fee.

Is invoice finance suitable for my business?

Here are some examples of businesses that can benefit from using invoice financing:

Wholesalers

They buy raw materials and have bills to pay long before their customers clear their dues. With invoice finance, they can keep their operations smooth and steady.

Recruitment agencies

They have passionate individuals working for them, expecting timely pay, even if the agencies' clients are taking their time with invoices.

Service based businesses

Businesses in IT or marketing, or even construction companies, face similar challenges. They do their job, sometimes waiting months for payment, all the while having their own bills to pay.

What are the eligibility requirements for invoice finance?

In order for a business to get approved for invoice financing, finance companies will consider certain aspects of your business. These could include:

  • Creditworthiness of your customers: It's not just about your business's credit worthiness, the finance provider often evaluates the creditworthiness of your customers. They need to be confident that your clients can and will settle their invoices.

  • Quality of invoices: The invoices should be free from legal disputes and not pledged as collateral elsewhere. They should be clear, precise, and for goods or services already delivered.

  • Business history: While some providers cater to startups, many prefer businesses with a track record. It's about ensuring that your business operations are consistent and reliable.

  • Volume of invoices: Some providers have minimum or maximum invoice amounts they're willing to finance. It's essential to match a provider with your business's invoicing volume.

  • Positive Cash Flow: Demonstrating a positive cash flow can increase a lender's confidence in your business's ability to manage finances effectively.

  • Documentation: Be prepared with essential documents like financial statements, list of outstanding invoices, company registration details, and details of directors or owners.

How to compare invoice finance options

Here are some things to look out for when comparing invoice finance options:

Percentage of the invoice value

This is the proportion of the invoice's total amount that the finance provider is willing to advance you immediately. A higher percentage means more immediate cash flow, which can be essential for businesses needing substantial funds upfront. Look for providers offering a balance between a generous upfront percentage and reasonable fees. Understand your business's immediate cash needs to determine which percentage suits you best.

Fees

This encompasses all the costs associated with the invoice finance service. Fees can significantly impact the net amount you receive. Some providers might have lower upfront percentages but also lower fees, offering better value in the long run. Ensure you're comparing apples to apples. Some providers might have a flat fee, while others might charge a percentage of the invoice. Always calculate the total cost over the contract's duration.

Reputation and reviews

Past experiences of other businesses with the finance provider can offer invaluable insights. A provider with a stellar reputation likely offers reliable service, prompt payments, and good customer support. Dive into online reviews, industry forums, and even seek recommendations from peers. Look not just for positive feedback, but how the provider handles any criticisms or issues.

Contract terms and flexibility

This covers the duration of the contract, any minimum or maximum invoice amounts, termination clauses, and other associated terms. A rigid contract might not suit businesses with fluctuating cash flow needs. On the other hand, a flexible contract might come at a premium. If you're on a growth trajectory, you might need a provider offering scalability without exorbitant fees.

Benefits and drawbacks of invoice finance

Pros

Immediate access to cash
Can boost cash flow and growth
Reduces the stress of chasing payments

Cons

There's a cost involved, which can eat into profit margins
Not all invoices might be accepted
It might not be suitable for businesses with low profit margins

Why choose invoice finance over asset finance?

The type of financing you chose ultimately depends on what your business needs are Most business would typically choose invoice finance if they need to sustain cash flow. As explained earlier, you use your unpaid invoices to get immediate money instead of waiting for customers to pay. Asset finance is a way of leasing business assets such as machinery or office furniture. This way, you're not tied down by having to buy these assets, which can lose value or become outdated over time. It's less of a hassle, avoids extra costs, and you don't have to worry about investing money upfront or dealing with the risks of owning assets.

Essentially, it keeps your business nimble, allowing you to grab new opportunities without stressing your finances or getting stuck with fixed assets.

What if customers can’t pay their outstanding invoices?

This is a genuine concern for many businesses, and the approach largely depends on the type of invoice financing you've chosen.

If you've opted for factoring, the finance provider steps into your shoes. They take on the responsibility of pursuing and collecting the payment. They have specialised teams and processes in place to manage such situations, ensuring that they recover the owed amount. This can be a relief for businesses that want to focus on their core operations without the added stress of chasing payments.

The key to managing such situations is a thorough credit control process. It's crucial to have clear terms, and regular follow-ups to handle late or missed payments.

On the other hand, if you've selected invoice discounting, the ball remains in your court. You retain control over the entire collections process, meaning you have to chase the customer for payment. This approach keeps the arrangement discreet, as your customers might not even be aware of your partnership with a finance provider. However, it also means you bear the brunt of any collection challenges.

Regardless of the method chosen, the key to managing such situations is a thorough credit control process. It's crucial to have clear terms, and regular follow-ups to handle late or missed payment

This not only ensures better cash flow but also fosters trust and understanding between your business and its customers.

What are some alternatives to invoice financing?

Invoice finance may not be the best option for many businesses. If you find that it might not work for you circumstances, you can consider other borrowing options:

Bank loans

Traditional bank loans involve borrowing a specific sum of money and paying it back with interest over a predetermined period. They offer fixed repayment terms, which can help with budgeting, and interest rates might be lower than some other financing options.

However, approval processes can be lengthy, and they often require collateral. There's also the potential for higher interest rates for smaller businesses with shorter credit histories.

Overdrafts

Overdrafts allow businesses to borrow money up to a certain limit through their bank accounts, providing flexibility. They're useful for short-term cash flow issues and only pay interest on the overdrawn amount. On the other hand, interest rates can be higher than traditional loans, and there's the potential for fees if you exceed the agreed limit.

Asset financing

This involves using company assets, like machinery or vehicles, as collateral for financing. It allows businesses to get financing based on the value of their assets, and it might be easier to obtain than unsecured loans. But there is the risk of losing the asset if repayments aren't met.

FAQs

How quickly can I access funds through invoice finance?

Typically, once approved, funds can be accessed within 24 to 48 hours. The speed often depends on the finance provider and the specifics of the agreement.

Will my customers know I'm using invoice finance?

It depends on the type. With invoice discounting, it's usually confidential, so your customers might not know. However, with factoring, the finance provider often takes on the role of collecting payments, so customers will likely be aware.

Do I need to finance all my invoices?

No, many providers offer selective invoice finance, allowing businesses to choose which invoices to finance.

How is my business's creditworthiness considered in the approval process?

While your business's financial health is considered, providers often place more emphasis on the creditworthiness of your customers since they're the ones paying the invoices.

Can startups or new businesses use invoice finance?

Yes, many providers cater to startups or newer businesses, especially if they invoice reputable clients. The focus is often on the quality of the invoices and the creditworthiness of the customers.

About the author

Author imageSalman Haqqi - Senior Personal Finance Expert
Salman Haqqi - Senior Personal Finance Expert
Salman Haqqi has over a decade of experience as a journalist in several countries around the world. In recent years, he has turned his focus to helping people make confident financial decisions and regularly comments in the media about personal finance.

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