A guide to invoice finance

Invoice finance is a flexible type of business funding that enables B2B SMEs to get paid faster. If you regularly invoice clients, you could be eligible for invoice factoring or discounting today. Let’s take a look at how it works and how to apply.

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A guide to invoice finance

What is invoice finance?

Invoice finance lets you use your unpaid invoices as security for funding. So, instead of waiting weeks or months to get paid, you can secure a percentage of the value of your invoices quickly – in some cases within 24 hours.  

Depending on their own risk criteria, an invoice finance company will typically provide up to 90% of the value of your invoices immediately. These funds can be used to bolster your cashflow or to invest in an area of your business.

When your customer finally pays up, the invoice finance company will provide you with the remaining value of the invoices. Invoice finance isn’t free, however, and the lender will subtract their own fees and charges from this final sum. 

Invoice finance could be worth exploring if you require funding for your business but are unable to offer assets as collateral for a loan. You can also decide whether or not to retain control over your business’ sales ledger.

How invoice finance works 

Step 1: You issue invoices to your customers on completion of work, with the usual payment terms of 30 to 90 days. 

Step 2: After you’ve set up your invoice finance facility the company will effectively buy the debt your customers owe. 

Step 3: The invoice finance company advances you up to 90% of the value of the invoices, sometimes within as little as 24 hours. 

Step 4: Your clients pay their invoices into the finance company’s account.

Step 5: The finance company provides you with the remaining balance (after subtracting the fees and charges for their service). 

Invoice finance example

Sarah's Interiors Ltd has a big new project coming up. Sarah knows she'll need to pay for extra materials and take on another member of staff to do this new job, but she'll only get paid when it's finished. 

Sarah is owed £5,000 by a previous client for a completed project, but the invoice has payment terms of 30 days. Sarah agrees to an invoice finance deal that will give her 85% of the invoice up-front, with total fees and charges at 3%. 

Sarah decides to go ahead and take out invoice finance for her small business. To recap, the value of the invoice she wants to finance is £5,000. The lender agrees to advance her 85% of the invoice (£4,250). The lender charges a fee of 3% (£150). 

Sarah shows the invoice to the lender and receives her advance of £4,250 within a couple of days. Then, when the customer pays the invoice, Sarah gets the remaining value of the invoice (£750) minus fees (£150), so she receives £600.

Types of invoice financing

You have a few options to choose from. In the UK invoice finance falls into three main categories: invoice factoring, invoice discounting and selective invoice finance

1. Invoice factoring

Invoice factoring is where the lender provides credit control services to ensure your clients pay on time. This can help you focus on running your business instead of chasing late payments, however your clients will know you’re using invoice finance. 

  • Your clients will know you're using a factoring provider

  • Factoring providers can credit check potential customers for you

  • Factoring can be easier for smaller or early-stage companies to secure

2. Invoice discounting

Invoice discounting is when you retain control over your business’ credit control process. Although your clients might not be aware that you’re using invoice finance, you won’t benefit from someone else doing the invoice chasing for you. 

  • It’s generally available to more established businesses with higher turnover

  • You'll still have to do your own credit control to ensure customers pay on time

3. Selective invoice finance

Selective invoice finance lets you choose specific customer accounts to finance, while spot factoring allows you to choose specific invoices. Unlike factoring and discounting, these aren't full-facility products. Essentially, you get to choose which invoices you'd like to finance and handle the rest as normal. 

Invoice finance pros

As with any funding option there are both pros and cons to financing your invoices. Here are some of the key advantages:

  • No risk to assets: Your unpaid invoices act as security for the loan and you usually won’t be expected to provide additional security.

  • It’s quick to obtain: Traditional bank loans can take a long time to approve, whereas you could get invoice finance funding within 24 hours. 

  • It’s scalable: As your business’ turnover increases, you’ll be able to access more cash and continue to improve your business cash flow.

  • It’s time saving: Invoice finance speeds up the business invoicing process; invoice factoring companies essentially act as credit controllers too, allowing you more time to focus on your business. 

Invoice finance cons  

Of course, there are things to consider when you explore invoice financing. As a business owner, some of the main drawbacks to consider include: 

  • Reliance on customers: Depending on the agreement with the lender, you might be held accountable if your client doesn’t pay their invoice. 

  • Short-term costs: You may have to pay charges and fees for using the services.  

  • Confidentiality: With invoice factoring you’re not the one handling the credit control process, and this could impact clients’ perception of your business. (This isn’t the case with discounting though.)

  • Longer-term costs: You’ll need to consider interest rates and the processing costs associated with lenders if you choose invoice factoring. 

Are you ready to apply for invoice finance?

You’ll have to meet various requirements to be eligible for invoice finance. While each lender’s risk criteria is unique, there are certain things they’ll be looking for. 

For instance, you’ll have to have a trading history and be able to prove that you issue invoices to your clients. The lender will need to look at your financial statements, and s will also review your clients and their payment habits. 

You can use Funding Options to compare invoice finance products and find the best finance solutions on the market. 

Start by telling us how much you need to borrow, what the finance is for and how quickly you need it, and we’ll compare over 120 lenders to match you with the right business finance options for your needs.

As well as invoice finance, we cover a range of financing options, including asset finance, merchant cash advances, invoice finance, revolving credit facilities, business credit cards and overdrafts.  Whatever your needs, we’ll help you trade and grow with confidence. Start your funding journey with us today.

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Vivek Seda

Vivek Seda

Asset Lending & Property Team Lead

Vivek Seda is the Asset Based Lending & Property Team Lead at Funding Options. Vivek has been in the commercial finance industry for over five years, helping SMEs in the UK access over £40m of funding in that time. He also supports the business on working on corporate finance and structured transactions successfully funding Acquisitions and MBOs for businesses.

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