Invoice finance explained
What is invoice finance?
Invoice Finance is a commercial finance product which is used to release funds to a business, with outstanding invoices used as security.
This highly flexible form of borrowing can be used to free up funds from your debtor book, relieving the pressure placed on your cash flow. Many businesses are turning to this option to take back control of their finances, allowing them the breathing space needed to move forward.
How does invoice financing work?
Invoice finance providers lend you a percentage of the invoices you issue as soon as they’re issued, avoiding the need to wait for the payment terms agreed with your customer.
When the invoice is settled, the amount released by the lender is repaid, in addition to any interest and charges, with the borrower receiving the balance.
Why do companies take out invoice finance?
Invoice funding solutions are used by businesses who want to improve their cashflow, without having to wait up to 120 days for customers to make payment.
This isn’t the only reason however, some types of invoice finance pass on the credit control process to their invoice finance provider. This takes away the strain of having to chase invoices and risk damaging the customer relationship.
Who should take out invoice finance?
There are several industries that tend to benefit greatly and the most common are:
- Security firms
Of course, any company supplying on payment terms of 30 days or more can benefit, regardless of industry.
Types of invoice finance
This type of business borrowing can be broken down into a number of different products, they are:
Invoice factoring passes credit control services to your new lender and as such is the type of invoice finance that is the most visible to your customers and staff. On top of funding invoices as they’re raised, the lender will ensure customers pay on time and will chase when they don’t.
As factoring involves passing credit control to your lender, it can be great for smaller, or newer companies. The main benefit (outside of helping cashflow) is that it can save a lot of time that would otherwise be lost chasing invoices.
Invoice discounting works in much the same way as factoring, other than the fact that the borrowing company remains responsible for their own credit control.
The main advantage to this is that customers are less likely to become aware that you’re using invoice finance.
Although this may be a benefit, it does mean that you’ll still have to take time out to ensure that invoices are paid on time and in full.
Selective invoice finance
Selective invoice finance, also known as spot factoring, or single invoice finance allows businesses to raise funds against, one, or several invoices. Once the facility is set up, you’re usually able to return to the lender again and fund other invoices very quickly.
These facilities are a great option for businesses who need to raise cash quickly, but usually have no need to raise cash against invoices.
How much can I borrow?
How much of each invoice can I access upfront?
The maximum you could borrow is 95% of the value of your sales invoices. For example, a £20,000 invoice would release £19,000 within 24 hours.
Are there any other restrictions?
In some cases, where your customers are not credit worthy, you may find that some lenders will restrict the amount released for those customers, or even exclude them altogether.
As such, it’s important that you consider the bigger picture when looking to maximise the amount released.
Costs of invoice finance
The cost of these facilities is usually priced based on the financial strength of your business and its customers, plus the type of facility that you require. The main costs can be broken down into two fees:
The service fee covers the costs of managing your facility. This fee is usually charged based on your turnover.
The discount fee is the interest charged on the funds that you borrow. It’s charged based on the amount drawn down at any time and as such, you will save money when invoices are settled early, while it will cost more when invoices are settled late.
Where to get invoice finance
There are a number of different lenders who are active in the market. Each lender has their own application process and criteria with their own areas of expertise.
We work hard on your behalf to find the best providers for your circumstances – and we don’t charge a broker fee for our service. We try to cover all the leading lenders in our invoice finance comparison, to give you the broadest range of options possible.
Although people have historically used their own bank to provide funding, a number of new lenders have entered the market. This has improved the choice for borrowers. Here we break down the different types of lenders, and how they tend to work.
High street banks
High street banks have historically been the go-to resource. As with other forms of finance, the offering from high street banks is usually aimed at the prime end of the market.
The rates offered will usually be low, as will any fees. The price to pay for this is that the bank will usually want to see a long and successful trading history, with plenty of security and a strong balance sheet.
The products offered by high street banks will often be the cheapest. However, the application process is often more difficult than other lenders. If you or your business have a poor credit history, a lack of trading history or few assets, you may find high street funding difficult to secure.
There are a number of specialist lenders in the market, including challenger banks and lenders who offer only invoice finance and other forms of asset-based lending.
Generally, these lenders will work in a similar way to high street banks but will be more flexible in their criteria. This gives you a much better chance of success in your application and also makes the process much quicker.
Peer-to-peer (p2p) platforms
Peer-to-peer lending is becoming increasingly common and is proving popular in the selective invoice discounting space too. There are a number of P2P funded lenders operating in this area, and they can offer excellent terms in the right situation, while also acting quickly.
How to get your application approved
Prepare your documents upfront
When looking to submit a new application to a lender, it’s a good idea to prepare the documents required upfront. This allows you to submit all, or at least most of the information required upfront. In most instances, the following will be required:
- A fully completed application form
- A list of your customers
- Sales/debtor ledger
- Details of any outstanding invoices
- Financial records for your business (accounts and bank statements)
Be responsive and answer any questions as quickly as possible
Your lender is probably very busy, and it pays to stay at the front of their mind.
This can also pay dividends in terms of the deal you get. Responding quickly and accurately will give the lender a better impression of you and your business, which may mean a better deal where funding is individually priced.
Will I qualify for invoice finance?
You stand a very good chance of qualifying if you own a UK business that raises invoices to clients or customers who are creditworthy. The invoices raised must be to other businesses, rather than directly to consumers.
We can arrange facilities for Ltd companies, LLPs, partnerships and sole traders.
Can you offer invoice finance to start-up businesses?
Yes, if your business is raising invoices to customers on payment terms of 30 days or longer, then we can usually offer finance. Invoice financing is a good option for many new businesses as you may be more likely to qualify for it compared to a business loan.
How quickly could I be accepted for an invoice finance facility?
Although there’s an application process to navigate, it’s possible to complete this and have your facility up and running in just a few days. When switching from another provider, you may encounter a few delays as part of the switchover, but we can help to manage this process and minimise any delays.
Is invoice finance right for my business?
It can be a great tool for releasing additional capital for your business. Each business is managed differently and there are a number of factors to consider before deciding to take out invoice finance.
Is invoice financing a good idea?
As with any financial product, this depends on your personal and business circumstances, but it can be a very good idea for businesses in need of improved cashflow.
How do I choose the right invoice finance product?
If the need for additional working capital is likely to be long-term and you are paid in terms of 30 days or more, you should consider invoice discounting or invoice factoring. The key difference is around credit control.
Although the idea of giving up credit control to the lender might seem appealing, it isn’t always simple. Where you have a strong relationship with your customers, you may find that they contact you anyway, rather than responding to your invoice finance provider.
Where funding is short-term, selective invoice discounting is the better product for you. Before proceeding, it is worth comparing the cost against other forms of business finance, such as business revolving credit facilities and business loans.
Can you offer bad debt protection & other add-ons?
Yes, our providers are able to offer full bad debt protection. This is designed to protect you from losses in the event of your customer becoming insolvent and failing to make payment.
There are several add-ons available to help protect your business, each of which has a cost. Our experts talk you through all of your options and the costs associated with each. We can help make the process simple and easy to understand.
Is invoice finance regulated?
The invoice finance market isn’t currently regulated by the Financial Conduct Authority (FCA). This is in line with most other types of business finance.
If you’re looking to ensure you work with trustworthy organisations to keep your money safe, you could choose to work with an FCA regulated broker, and reputable lenders.