Get paid faster with invoice finance
Borrow against unpaid customer invoices to maintain cashflow for your business
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 95%. 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 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 95% 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 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 95%. 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
Invoice discounting
Is invoice finance suitable for my business?
Here are some examples of businesses that can benefit from using invoice financing:
Wholesalers
Recruitment agencies
Service based businesses
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 creditworthiness, 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, a 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
Fees
Reputation and reviews
Contract terms and flexibility
Benefits and drawbacks of invoice finance
Pros
Cons
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. 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, asset finance 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 some businesses. If you find that it might not work for you, 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 you 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 the purchase of assets, like machinery or vehicles, through financing. It often allows businesses to get the finance based on the value of the asset too as it can be used as collateral, and so might be easier to obtain than unsecured loans. But there is the risk of losing the asset if repayments aren't met.
FAQs
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.
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.
No, many providers offer selective invoice finance, allowing businesses to choose which invoices to finance.
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.
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.
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