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 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 cash flow or to invest in an area of your business that needs funding.

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 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. There are different types, and 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 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 at 3%. 

Sarah decides to go ahead and take out invoice finance for her small business. Remember, the value of the invoice she wants to finance is £5,000. The lender agrees to advance her 85% of the invoice (£4,250). They charge 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. 

Your business’ size, circumstances, needs, preferences and goals will determine the type of invoice finance you opt for. We’ve written a handy blog post that explores the key differences between invoice factoring and invoice discounting

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 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 fees lenders charge if you choose invoice factoring. 

Who’s eligible for invoice finance?

Lenders will have their own risk criteria, but here are a few things to consider if you’re looking for finance and are considering pursuing invoice factoring or discounting.

1. Are you a B2B business?

Invoice finance tends to be for businesses that trade with other businesses (B2B), as opposed to businesses that trade with individual consumers (B2C). That’s not to say you'll get turned down if you’re a B2C business, but you may be offered less.

2. Do you have a trading history?

Invoice finance is available to businesses that have a trading history; the lender will need to see that you have a track record of issuing invoices to your customers. Make sure that your financial statements are detailed and accurate, as the lender will review them. 

3. How much are you looking to borrow?

There’s no minimum threshold for invoice finance. However, if you need to borrow over £1 million a different type of business finance might be more suitable. 

4. How quickly do your customers pay?

Ideally, your customers should pay their invoices within 30 to 90 days. If they take longer to pay, your application might not be approved. The invoice finance provider will look at your customers’ paying habits and credit rating before making a decision. 

Are you ready to apply for invoice finance?

You’ll need 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, review your clients and assess 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. 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: 

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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