What is invoice financing?

Invoice finance is a way of borrowing money based on what your customers owe to your business. It works by using unpaid invoices to represent money that will be paid to you, avoiding the usual wait for the payment terms. These can be anything from 14 days to 90 days or even more. Invoice finance ensures you get most of the cash immediately, so you don't have to wait to get paid.

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What is invoice financing?

How does invoice financing work?

The concept for invoice finance is simple; rather than waiting days or weeks for your invoices to be paid by customers, lenders advance you most of the value immediately. That means you get paid faster for completed work, so you can focus on running your business.

If your business regularly invoices for work, you could be eligible for invoice finance. As one of the best ways to ease cash flow problems and get paid faster for completed work, invoice financing is a great way to ensure your business continues to have cash flow and can carry on growing without being held back by your finances.

Advantages of invoice finance 

As with any funding option, there are both pros and cons to committing to invoice financing. Some of the advantages of choosing either option are:

  • Gives your business quick cash-The clear advantage of invoice discounting is that you’re in control of raising cash quickly for your business. It can be made available as soon as an invoice is issued and can be used to help grow your business, buy more stock or pay wages.

  • Quicker turnaround- Compared to other types of business loans, invoice financing has a very quick turnaround. You could avoid having to ever wait again for the payment period by submitting your business invoices for invoice financing.  

  • No risk to assets- As invoice financing is an unsecured business loan in place of your invoices, you won’t have to offer up physical assets from your company

  • Boosts credit sales-  Invoice discounting can help convert credit sales into cash, which means SMEs enjoy quicker growth and development in a shorter amount of time.

Types of invoice finance 

There are two types of invoice financing available to businesses; invoice factoring and invoice discounting. Both finance products give businesses the freedom to choose how much control they have over their finances. Whether you want to be able to control the cash flow for your business or have the lender take care of it for you, both products provide the solution you need.

Let's take a closer look at the two product categories within invoice finance:

Invoice Factoring

Invoice factoring is the product where a lender is most closely involved. They will provide ‘credit control' services to ensure your customers pay on time, which could be exactly what you need to focus more on your business, instead of chasing late-paying customers.

Some of the key features to consider are;

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

  • Factoring providers can credit check potential customers for you

  • Easier for smaller or early-stage companies to secure

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Invoice Discounting

Invoice discounting is when you do the credit control for any payment made to your account. It's the most straightforward form of invoice finance and is more hands-on for a business but can also be more time-consuming. 

Some key features of invoice discounting are: 

  • Invoice discounting is 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.

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Restrictions of invoice finance

As with any type of finance product, there are some things to consider as a business when you explore invoice financing as a loan option. Some of the main restrictions to consider as a business owner is:

  • Your customers will need to be other businesses- Invoice financing is only available on commercial invoices meaning your customers have to be other businesses, not the general public.

  • Invoice factoring and client relationships- If you choose to apply for invoice factoring, then chasing payments will be out of your hands. This means your client relationships could potentially be impacted by this and there’s a risk of damaging these relationships.

  • Longer-term costs- Whilst invoice financing is a great short term solution for cash flow in businesses, it can have longer-term costs added on. Things to consider are interest rates and the processing costs associated with lenders if you choose invoice factoring.

As with any loan, invoice financing comes with some great advantages and some things to consider. If you’re not sure which option would suit your business or need a more flexible approach, there's a further option that could be just what your business needs.

Selective invoice finance and spot factoring

Selective invoice finance lets you choose specific customer accounts to finance, while spot factoring allows you to choose specific invoices. Either way, you can take a more flexible ad-hoc approach, and get funding when you need it.

Selective invoicing products differ from factoring and discounting because they aren't full-facility products. In other words, you can choose which invoices you'd like to finance, and deal with the rest as normal.

It's a good fit for businesses with a clear idea of how much money they need, but can be more difficult to secure than factoring or discounting. Whatever facility you choose, invoice finance can be a great way to improve your cash flow situation.

These products differ from factoring and discounting because they aren't full-facility products. In other words, you can choose which invoices you'd like to finance, and deal with the rest as normal.

An example of invoice factoring for business

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%.

Breakdown:

Invoice value = £5,000 Advance amount (85%) = £4,250 Fees (3%) = £150 When Sarah shows the invoice to the lender, she receives an advance of £4,250 within a couple of days. Then, when the customer pays the invoice, the full £5,000 goes into a bank account controlled by the lender.

Sarah gets the remaining value of the invoice (£750) minus fees (£150), so she receives £600.

Both types of invoice finance operate under this principle, so you can choose the type that best suits your business. Why not get started today and find the right invoice finance option for your business needs.

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