Invoice Finance for UK SMEs: Invoice Factoring And Discounting
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Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in invoice finance
Invoice finance can transform the cashflow of a business by allowing you to release up to 95% of your invoices quickly, without having to wait weeks for payment.
By releasing the tied-up money from your sales ledger upfront, you will improve your cash flow and have the funds needed to manage, or even grow your business without stress.
Invoice Financing Key Features
Max Funding
Up to 95%
Invoices Paid
From 24 hours
Products Available
Invoice Factoring, Invoice Discounting & Selective
Application Timescale
From 24 hours
Online Comparison
Apply in 4 minutes
Criteria
Funding for UK businesses only
Bad credit considered
Start ups accepted
No minimum or maximum turnover
How To Apply For Invoice Financing
Fill out your details using our simple online invoice finance tool.
Lenders quote your business by uploading terms to the platform based on your business circumstances.
Once you’ve received an offer that you like, begin discussions with that lender in one click. If you like their solutions, apply.
Your application can be moved forward and once approved, formally signed and completed.
The application process is complete and your funds are sent to your business bank account.
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What is invoice finance?
Invoice finance is a type of business finance that allows you to release the cash owed to you in unpaid invoices. Up to 95% of the amount due can be released on day 1, meaning you no longer have to wait weeks, or even months to get paid.
Whether it is unlocking the cash tied up in your debtor ledger, funding growth or reducing funding costs, the right invoice funding solutions can help you achieve your goals.
When your business uses invoice financing, funds are released within 24-48 hours of your invoice being raised. This speeds up your cash flow cycle, which improves business cash flow and makes it easier to manage your business’ finances.
When the invoice is settled, you receive the balance, minus any fees agreed with your funding provider.
How can an invoice funding facility help my business?
An invoice finance facility can help your business by improving it’s cashflow and boosting working capital, by releasing the cash tied up in unpaid invoices.
This can lead to improved profitability due to a quicker cashflow cycle that allows you to grow your business and fund your day to day business expenses without issue.
Invoice finance – How does it work for a SME business?
In the UK invoice finance works as follows:
- 1 – You issue invoices as you usually would on your standard delayed payment terms. You then provide a copy of the invoice to your finance provider.
- 2 – The funder releases funds based on the payment due, usually in 24-48 hours.
- 3 – Once you, the invoice is settled by your customer.
- 4 – The balance is paid to you, minus the cost of finance, as laid out in the example below.
Example of this finance used to improve working capital
ABC Printing Ltd is growing quickly and plans to expand further. Their customers tend to pay on delayed terms – 30 days after an invoice is issued.
As the business takes on more orders, the cost of producing the orders is increasing, as more materials, staff and other resources are required.
To compound this, the value of invoices raised, but not yet settled is increasing. In this example, £50,000 is outstanding and the client chooses to take on a facility with a 90% advance rate and 3% total fees. As such, they are able to release £45,000 upfront.
When payment of the invoice is made, the remaining £5,000 is released, minus total costs of £1,350, leaving £3,650.
Finance for invoices is suitable for many small or medium-sized companies with b2b customers as it lets businesses get paid faster, sometimes within 24 hours, as they receive a large percentage of each invoice as soon as it is raised, using their unpaid invoices as the basis for a loan or an advance.
Will I be eligible for lending?
If you issue invoices to your customers and accept payments on 28 day terms or longer, you have a great chance of being eligible. Here’s a quick guide to which businesses can qualify:
You operate a UK B2B business
Whether you’re selling goods or providing services, business to business (B2B) companies can qualify. This is because the lender will assess the strength of your clients businesses when deciding whether you’re eligible to access funds.
There is a sign off process for completed work per invoice
The sign off process prior to issuing an invoice to your customers must be watertight. A clear purchase order or sign off on the work completed means that there is no doubt that your invoice must be paid.
You’re a UK based company
As a UK based company, our service is only available to those who live or trade in the UK.
Even if the company has existing finance arrangements such as an existing bank loan or overdraft, invoice discounting or factoring may still work for a business.
What are the different types of asset based lending?
In the UK invoice finance market, there are three main products to consider, they are invoice factoring, invoice discounting and selective invoice finance.
Invoice factoring
These facilities hand credit control to your lender, who will take the necessary steps to ensure your invoices are paid on time. This means that you will no longer have to spend time on credit control and can solely focus on running your business.
The key considerations are:
- It makes managing your sales ledger simple
- It can save you a lot of time
- Your customers will know you’re using a factoring provider
Factoring is ideal for companies that don’t have in-house credit control
Invoice discounting
Invoice discounting allows you to retain responsibility for your credit control, meaning your customers won’t know you’re using the facility.
As soon as the customer pays the invoice, the business will deposit the funds into a bank account that is controlled by the invoice discounter, who will then pay the business the remainder of the invoice, less any fees.
The key considerations are:
- It allows you to retain management of your credit control
- It may be cheaper as the lender doesn’t have to pay staff to manage your credit control
- Usually favoured by larger companies with high turnover
Selective invoice finance
This product, also known as spot factoring allows you to choose either single invoices or certain customers to finance.
This is great for those who just need the odd invoice funding in advance, but don’t want to take a full facility.
What are the Advantages?
The key advantages are:
Improved Cash Flow
It can significantly improve your cash flow by releasing the funds tied up in unpaid invoices. No more waiting around for 30, 60, or even 90 days for your customers to pay. With a facility in place, you can get the cash you need almost immediately. Invoice financing enables businesses which trade on credit, or delated payment terms to improve cash flow by releasing funding against cash tied up in unpaid invoices.
Ability to Pay Employees and Suppliers
With improved business cashflow, you’ll have plenty of money to make sure your employees and suppliers are paid on time. This will keep your business running smoothly and may even allow you to negotiate a better deal with your suppliers.
Opportunity to Reinvest in Operations and Growth
The extra working capital raised can be reinvested into your business operations. Whether you want to bolster cash flow, purchase new equipment, hire more staff or expand into new markets, you’ll have the money to do it.
Credit Control and Collection Services
If you opt for a factoring product, your lender will handle credit control and collection services. This saves you valuable time and resources, allowing you to focus on what you do best – running your business.
Flexibility
It is a very flexible way to fund your business. You can choose to finance all of your invoices or just a select few. In addition, your facility grows as your turnover increases. The more you invoice, the more funding you have access to.
What are the Disadvantages?
Although there are some excellent benefits, there are also some drawbacks to consider:
Costs
As with any form of finance, there are costs involved. There are service fees, discount fees and possibly other charges. Whilst they tend to be a small percentage of the amount borrowed, it is still a cost to consider.
Customer Relationships
Should you choose to hand over credit control to your provider, your customers will be paying your factoring lender directly. This could potentially impact your relationship with your customers.
Dependence on Customer Creditworthiness
The amount you can borrow can depend on the creditworthiness of your client base. If your customers have poor credit or a low capacity of borrowing, you may not be able to access much funding.
What our expert says…
“Invoice finance is a key tool for any business owner who operates on delayed payment terms. For these businesses, cash flow management is a key issue and the more successful you are, the tighter cash flow becomes.
As an industry, we haven’t always made it easy to access funding without being bombarded with phone calls, and this is something that we wanted to change.”
Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in business lending
What are the costs of this finance?
The cost depends on your chosen provider, your circumstances and the people you’re invoicing. The cost is set as a percentage of the financing amount.
The cost of financing invoices will vary depending on a variety of complex factors including:
- Your business type
- Customer creditworthiness
- How much you invoice
- The value of the invoices
- What finance facility you choose to use
There are typically two main costs to your business:
- Service Fee: This is a fee for managing your sales ledger and collecting payments from your customers. It’s usually a percentage of your turnover and can range from 0.75% to 2.5%.
- Discount Charge: This is similar to the interest you pay on a loan. It’s charged on the cash advanced to you and is usually linked to the Bank of England base rate. It can range from 1% to 3% over the base rate.
Remember, these are just ballpark figures. The actual costs can vary, so it’s important to discuss this with your chosen provider to understand the full cost of the service.
Keep reading – Invoice finance for recruiters
Are you ready to apply for finance?
If you’re amongst the thousands of UK businesses who would benefit from releasing cash from their unpaid invoices, we can help.
Our online platform allows you to compare invoice finance products and find the best deal in minutes, by making lenders fight for your business.
You simply input your company details and finance requirements, sit back and wait for the offers to start rolling in through on our secure platform.
Our team of experts will then help you choose the best option, move the application forward and access the cash tied up in your sales ledger.
What are the alternatives?
The alternatives to financing your sales ledger in the UK are:
- Business loans – A business loan, especially an unsecured business loan is less flexible than invoice finance but can allow you to borrow money quickly. They’re repaid over a fixed term through regular monthly payments.
- Business overdrafts – An overdraft allows you to take your business bank balance into the negative. An overdraft is very flexible, but a comparatively expensive way to borrow money.
- Merchant cash advance – If you take payments through a card terminal, a merchant cash advance could allow you to borrow against future card receipts. It’s a fast way to inject funds into your business, and is repaid through taking a small percentage of your card receipts each day.
Invoice Funding Frequently Asked Questions
How does invoice finance compare to other products such as a business loan, asset finance or an overdraft?
Invoice finance is a form of revolving credit, and is therefore more flexible than a business loan. It acts as an ongoing facility that moves in line with your business needs, whereas a business loan is a static facility that gives you an upfront cash advance and is repaid through regular monthly repayments.
Unlike a traditional loan, invoice finance is an effective form of borrowing money without a loan term or fixed monthly repayment. This removes the feeling that you’re borrowing money.
An overdraft is a similar product but tends to offer you less borrowing power and comes with much higher costs.
It may also be easier to qualify for finance secured against invoices than it would for business loans or overdrafts, this is because the lender has security over the funded invoice.
Can I access invoice financing if I have a bad credit score or a poor credit report?
Yes, we can offer solutions to business borrowers with bad credit, as long as your business customers are strong.
This is because your customers will ultimately pay the lender back when they settle the invoice, meaning your credit score becomes less important than the credit report of your customers.
Credit history is considered to some degree, with the credit focus is instead on the credit quality and repayment history of your customers. A strong debtor book enables you to release cash from one of your most valuable assets to part-fund an acquisition or to finance ongoing working capital needs.
Whilst your business will still be assessed as part of the application process personally, any negative credit history you have is only part of the picture.
We work with a number of lenders who take a common-sense approach to these issues and we’ll work with you and your business to present your circumstances in the best possible light.
Is asset based lending for invoices a loan?
It is a form of business revolving credit, so while it is a form of finance, when looking at the whole facility, it isn’t quite a loan.
That said, when looking at it on an invoice by invoice basis, it does work like a small loan each time more funding is released.
Is invoice finance a good idea for UK businesses?
Yes, invoice finance is a good idea for businesses that need a cash injection to improve their cash flow and fund business expansion.
Waiting 30-90 days to receive payment of invoices can put a financial strain on a business that ultimately holds it back. For this reason, many business owners choose to release money from their unpaid invoices to provide a cash buffer.
By speeding up your cash flow cycle, you can avoid being hampered by a lack of cash and make the right decisions for the future of your company.
What happens if I need more money?
As a form of revolving credit, these facilities are designed to grow with your business, meaning you can access more cash as your turnover grows.
This means that the protection for your cash flow is future proofed and you won’t be held back by your facility if your circumstances change in the future.
Will my customers know I’m releasing cash from my invoices?
This depends on the type of finance that you choose to take. Factoring sees your lender take over credit control, meaning your business customers will be aware of their involvement.
If you’d prefer to avoid this situation, consider a confidential invoice discounting product. This allows you to retain control of the credit control process and keeps things separate from your customers.
Can I get out of it if I’m able to pay it off?
Yes, if you no longer need the facility and have the cash to repay it, you can simply pay it off.
Most providers have a minimum term of 12 months, and once this has passed, you’re free to refinance to a new provider or repay it completely.
What happens if a customer doesn’t pay an invoice that has been financed?
This depends on the type of finance agreement that you hold. If you have a non-recourse factoring agreement, your finance provider will take on the risk of your customers failing to pay.
This means that in the event of non-payment, your business will not have to repay the advance. There is some trade off to consider however, as non-recourse agreements tend to come with slightly higher costs.
A recourse factoring agreement sees you retain the risk of non-payment. In the event of a client failing to pay, your business would be expected to repay the lender.
Is B2B invoice financing regulated in the UK?
The accounts receivable financing market, as part of the commercial 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.
What is invoice financing, and how can it improve my business’s trading liquidity?
It is a type of asset-based lending that allows businesses to release the cash that is tied up in their unpaid invoices, improving liquidity of a trading business. It can be used to fund British transactions for a small business, right through to large corporate international trade.
By using this solution, companies in sectors such as manufacturing, recruitment, and haulage can better manage their cash flow and scale efficiently.
How does ABC Finance’s technology make my finance comparison easier?
ABC has developed market-leading technology that lets business owners compare finance options from leading providers like Bibby Financial Services, Lloyds Bank, and Novuna.
It helps businesses from startup, SME sectors and corporate markets to increase efficiency and secure the best pricing on their finance needs.
Is invoice finance suitable for startups and SMEs?
Yes, invoice financing is suitable for startups and SMEs.
It provides immediate access to working capital without taking on traditional debt. This allows smaller businesses to focus on growth, international trade, and investment in critical areas like assets and scalability.
How does this finance protect against bad debt and fraud?
Many providers include bad debt protection and fraud detection services, ensuring asset protection for your accounts receivables.
Leading providers like Bibby Financial Services, Skipton Business Finance, Lloyds Bank and Novuna have robust systems in place to protect your business.
Can invoice finance support businesses involved in international trade?
Yes, it is ideal for British businesses engaged in international trade.
It helps fund the gap between invoices issued to overseas clients and payment collection, improving cash management and mitigating privacy concerns associated with cross-border transactions.
What types of UK businesses benefit the most from asset based lending?
It is beneficial for businesses in many industries, including recruitment agencies, haulage, manufacturing, and SME sectors.
It helps them maintain working capital liquidity, enhance cash management, and scale operations without traditional borrowing constraints.
