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ABC Finance » Invoice finance
Gary Hemming Headshot

Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in invoice finance

Invoice finance allows you to release cash from your unpaid invoices and is a key tool to help manage the cash flow of many businesses.

In this guide, we’ll delve into the nitty-gritty of invoice finance, explaining what it is, how it works, and the different types available.

So, whether you’re a startup looking for ways to boost your cash flow or an established company exploring financing options, this guide is for you.

What is Invoice Finance?

Invoice finance is a financial solution that allows businesses to unlock the cash tied up in their unpaid invoices. It’s a way for businesses to maintain a steady cash flow without having to wait for customers to pay their invoices.

This can be particularly beneficial for businesses that offer their customers extended payment terms, such as 30, 60, or even 90 days.

In essence, this type of finance is a way for businesses to borrow money against the amounts due from customers.

It’s a business finance tool that can help businesses manage their cash flow, pay their employees, reinvest in business operations, and even grow their business.

It’s a popular option among UK SMEs, but it’s also used by larger companies.

Many business owners in the recruitment, manufacturing, service industries, or indeed, any business that issues an invoice on 30, 60 or 90 day payment terms could be using this type of finance.

In fact, business customers often do not know that finance has been raised against their invoice.

How does it Work?

The process of invoice finance is relatively straightforward. Here’s a step-by-step breakdown:

  1. Your business provides a product or service to a customer and issues an invoice.
  2. You then present this invoice to the invoice finance provider (the ‘factor’).
  3. The factor (finance company) advances a percentage of the invoice value to you. This finance is typically between 70% and 90%, and it’s usually paid into your business bank account within 24 hours of the invoice being raised.
  4. Your business can then use this cash injection to cover operational costs, invest in growth, or whatever else you need.
  5. The customer pays the invoice directly to the factors account according to the agreed payment terms.
  6. Once the customer has paid the invoice in full, the factor will pay the remaining balance minus their fee for offering finance to your business into your business bank account.

This process can significantly improve your business’s cash flow by ensuring you have access to funds as soon as you issue an invoice, rather than waiting for the customer to pay.

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Types of Invoice Finance

There are several types of finance available against the invoice ledger of a business, each with its own features and benefits.

Let’s explore some of the most common ones:

Invoice Factoring

Invoice factoring involves a business selling its invoices to a factoring company at a discount.

The factoring company then takes on the responsibility of collecting the invoice payments from the business’s customers.

This can be a great option for businesses that don’t have the resources or desire to manage their own credit control, but still need access to finance.

Invoice Discounting

Invoice discounting is similar to factoring, but the business retains control over the collection of payments.

The invoice discounting company provides an advance on the invoice value, but it’s up to the business to collect the payment from the customer.

When the invoice is settled, it is paid into your business account, you then settle your credit with your finance provider.

This can be a good option for businesses that want to maintain direct communication with their customers but still require finance against their invoice book.

Asset-Based Lending

Asset-based lending is a type of invoice finance where a business can secure funding against a range of assets, including invoices, inventory, machinery, and property.

This can provide a larger funding facility for businesses with significant assets.

While this is a type of business finance, it is a slightly different product as it allows you to raise finance against a range of business assets – an invoice is just one of these types of asset.

International Trade Finance

International trade finance is designed to support businesses that trade overseas.

It can help businesses manage the risks associated with international trade, such as currency fluctuations and non-payment by customers.

Single Invoice Finance

Single invoice finance, also known as spot factoring, allows businesses to finance individual invoices.

This can be a flexible option for businesses that have occasional cash flow needs or large,one-off invoices.

Each of these types of finance for your business has its own set of advantages and considerations, so it’s important to choose the one that best fits your business’s needs and circumstances.

Whether you’re a small startup or a large, established company, there’s an invoice finance option out there that can help boost your cash flow and support your business growth.

In the next sections, we’ll delve deeper into the advantages and disadvantages of invoice finance, and we’ll help you determine whether it’s the right option for your business.

We’ll also provide a step-by-step guide on how to get started with invoice finance, so stay tuned!

What are the Advantages?

Now, let’s dive into the many benefits of invoice finance. It’s not just about borrowing cash quickly (although that’s a big part of it!).

There are several other advantages that can make a real difference to your business.

  1. Improved Cash Flow: This is the big one. Invoice finance can significantly improve your cash flow by allowing you to access funds tied up in unpaid invoices. No more waiting around for 30, 60, or even 90 days for your customers to pay. With invoice finance, you can get the cash you need almost immediately.
  2. Ability to Pay Employees and Suppliers: With improved cash flow, you can ensure that your employees and suppliers are paid on time. This can help maintain good relationships and keep your business running smoothly.
  3. Opportunity to Reinvest in Operations and Growth: With the extra cash from invoice finance, you can reinvest in your business. Whether it’s purchasing new equipment, hiring more staff, or expanding into new markets, invoice finance can provide the funds you need to grow.
  4. Credit Control and Collection Services: If you opt for invoice factoring, the factoring company will handle credit control and collection services. This can save you time and resources, allowing you to focus on what you do best – running your business.
  5. Flexibility: Invoice finance is flexible. You can choose to finance all your invoices or just a select few. Plus, the amount of funding you can access grows with your sales. The more you invoice, the more funding you can access.

What are the Disadvantages?

While invoice finance has many benefits, it’s only fair that we also discuss some of the potential drawbacks.

After all, it’s important to have all the facts before making a decision.

  1. Costs: Invoice finance comes with costs. These can include service fees, discount fees, and other charges. It’s important to understand these costs upfront and factor them into your decision.
  2. Customer Relationships: If you choose invoice factoring, your customers will need to pay the factoring company directly. This could potentially impact your relationship with your customers.
  3. Dependence on Customer Creditworthiness: The amount of funding you can access through invoice finance depends on the creditworthiness of your customers. If your customers have poor credit, you may not be able to access as much funding.
Gary Hemming Headshot

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.”

– Gary Hemming, Finance Expert at
ABC Finance

Is it a Good Idea to Finance my Invoice book?

So, is invoice finance the right option for your business? The answer to that question depends on a variety of factors. Here are a few things to consider:

  1. Your Industry: Invoice finance is particularly popular in industries where long payment terms are common, such as manufacturing, recruitment, and B2B services.
  2. Your Customers: If your customers have a good credit history and reliably pay their invoices, invoice finance could be a good option for you.
  3. Your Cash Flow Needs: If you often find yourself waiting for customer payments and struggling with cash flow as a result, invoice finance could provide a solution.
  4. Your Ability to Handle Credit Control and Collections: If you’re comfortable handling your own credit control and collections, invoice discounting could be a good fit. If not, invoice factoring could be a better option as your lender will handle credit control on your behalf.

How to Get Invoice Finance

Ready to give invoice finance a go? Here’s a step-by-step guide on how to get started:

  1. Assess Your Needs: First, determine how much funding you need and how often you need it. This will help you decide whether invoice finance is the right option for you.
  2. Choose a Provider: There are many invoice finance providers out there,from high-street banks to independent finance companies. Do your research, compare your options, and choose a provider that suits your needs and circumstances.
  3. Apply: Once you’ve chosen a provider, you’ll need to apply for invoice finance. This usually involves providing information about your business, your customers, and your invoices.
  4. Agree on Terms: If your application is approved, you’ll then agree on the terms with the provider. This includes the percentage of the invoice value that will be advanced, the fees, and the payment terms, directly into your business banking account.
  5. Send Your Invoices: Once everything is set up, you can start sending your business invoices to the provider. They’ll advance you a percentage of the invoice value, usually within 24 hours.
  6. Receive Payment: Your customers pay the invoice directly to the provider. Once the invoice is paid in full, the provider will pay you the remaining balance, minus their fee.

Remember, it’s important to seek financial advice before making any major financial decisions.

Invoice finance can be a great tool for boosting your cash flow, but it’s not the right solution for every business.

Make sure you understand the costs and risks involved, and consider all your options before making a decision.

How Much Does it Cost to Finance an Outstanding Invoice?

When it comes to invoice finance, one of the first questions on your mind is likely, “How much is this going to cost me?” Well, let’s break it down.

The cost of invoice finance can vary depending on the provider and the specific business arrangement you have with them.

However, there are typically two main costs associated with invoice finance:

  1. 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%.
  2. 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 or LIBOR. 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

Who are the best Providers if I’m looking to finance my Invoices?

There’s no shortage of invoice finance providers in the UK, each offering their own unique services and benefits.

Here are a few reputable providers you might consider:

  1. Lloyds Bank: Offers both invoice factoring and invoice discounting, with flexible funding options and online account management.
  2. HSBC: Provides a range of finance solutions against business invoices, including international trade finance for businesses trading overseas.
  3. Metro Bank: Offers a simple and straightforward service, with a dedicated team of experts to support you.
  4. Bibby Financial Services: Specialises in invoice based finance for SMEs, with a range of solutions including invoice factoring, invoice discounting, and asset-based lending.
  5. British Business Bank: While not a direct lender, they work with a wide range of partner finance providers to offer finance to UK businesses.

Remember, it’s important to do your research and choose a finance provider that suits your business’s credit needs and circumstances.

Before committing to a business finance product, always consider all options and compare with other products such as business loans, credit cards and revolving credit.

Invoice Finance

What are the Key Considerations When Using Invoice Financing?

Before diving headfirst into invoice financing, there are a few key considerations to keep in mind:

  1. Customer Relationships: If you opt for invoice factoring, your customers will be dealing directly with your factoring company when it comes to payments. Consider how this might impact your customer relationships and therefore your business.
  2. Cost: Make sure you fully understand the costs involved and have factored these into your financial planning.
  3. Contract Terms: Be clear on the terms of your agreement with the invoice finance provider. This includes understanding any minimum contract periods, notice periods, and what happens if a customer fails to pay an invoice.
  4. Confidentiality: If maintaining confidentiality is important to you and your business, consider invoice discounting, where your customers won’t know you’re using a finance service and borrowing against your ledger.

What are the Alternatives to Finance for my Invoice Book?

While invoice finance can be a great tool for boosting cash flow, it’s not the only option out there. Here are a few alternatives you might consider:

  1. Bank Loans: A traditional bank loan can provide a lump sum of cash, which you’ll repay over a set period of time.
  2. Overdrafts: A business overdraft can provide a safety net for your cash flow, allowing you to dip into negative bank balances up to a certain limit.
  3. Equity Financing: This involves selling a share of your business to an investor in return for capital.
  4. Crowdfunding: This involves raising small amounts of money from a large number of people, typically via online platforms.

Remember, the best financing option for your business will depend on a variety of factors, including your financial situation, your business model, and your long-term goals.

It’s always a good idea to seek professional financial advice before making a decision on business borrowing.

Comparing Invoice Finance With Other Finance Options

Alright, let’s take a step back and look at the bigger picture. Invoice financing is a fantastic finance tool, but it’s not the only option.

There are a plethora of finance options available to businesses, each with its own set of advantages and potential drawbacks.

From traditional bank loans to overdrafts, asset-based lending to equity financing, the choice can be overwhelming.

But fear not, we’re here to help you navigate this and find the best solution for your business.

What are the Key Considerations When Using Invoice Financing?

Before diving headfirst into invoice financing, there are a few key considerations to keep in mind:

  1. Customer Relationships: If you opt for invoice factoring, your customers will be dealing directly with your factoring company when it comes to payments. Consider how this might impact your customer relationships and therefore your business.
  2. Cost: Make sure you fully understand the costs involved and have factored these into your financial planning.
  3. Contract Terms: Be clear on the terms of your agreement with the invoice finance provider. This includes understanding any minimum contract periods, notice periods, and what happens if a customer fails to pay an invoice.
  4. Confidentiality: If maintaining confidentiality is important to you and your business, consider invoice discounting, where your customers won’t know you’re using a finance service and borrowing against your ledger.

What are the Alternatives to Finance for my Invoice Book?

While invoice finance can be a great tool for boosting cash flow, it’s not the only option out there. Here are a few alternatives you might consider:

  1. Bank Loans: A traditional bank loan can provide a lump sum of cash, which you’ll repay over a set period of time.
  2. Overdrafts: A business overdraft can provide a safety net for your cash flow, allowing you to dip into negative bank balances up to a certain limit.
  3. Equity Financing: This involves selling a share of your business to an investor in return for capital.
  4. Crowdfunding: This involves raising small amounts of money from a large number of people, typically via online platforms.

Remember, the best financing option for your business will depend on a variety of factors, including your financial situation, your business model, and your long-term goals.

It’s always a good idea to seek professional financial advice before making a decision on business borrowing.

Comparing Invoice Finance With Other Finance Options

Alright, let’s take a step back and look at the bigger picture. Invoice financing is a fantastic finance tool, but it’s not the only option.

There are a plethora of finance options available to businesses, each with its own set of advantages and potential drawbacks.

From traditional bank loans to overdrafts, asset-based lending to equity financing, the choice can be overwhelming.

But fear not, we’re here to help you navigate this and find the best solution for your business.

Private Equity vs. Invoice Funding: Which is Right for Your Business?

Now, let’s delve into a bit of a heavyweight bout in corporate finance: private equity vs. invoice finance. Private equity involves selling a share of your business to an investor in return for capital.

It can provide a significant cash injection, but it also means giving up a portion of your control over the business.

On the other hand, invoice finance provides an advance on your unpaid invoices, improving your cash flow without requiring you to relinquish any ownership. So, which is right for your business?

Well, that depends on various factors, including your financial situation, growth plans, and appetite for risk.

Unlike a banking loan or credit card, invoice financing can grow with your business to ensure that your borrowing always remains at the optimum level.

How to Use a Finance Calculator to Estimate Your Invoice Funding Costs

We’ve talked a lot about the benefits of invoice finance, but what about the costs? Well, a finance calculator can be a handy tool for estimating these costs.

By inputting a few key details, such as the value of your invoices and the terms of your agreement, you can get a quick and rough idea of how much invoice finance might cost your business.

But remember, a calculator can only provide an estimate. For a more accurate figure, it’s always best to speak directly with a finance provider.

Understanding Ledger Management in Invoice Finance

Finally, let’s talk about ledger management. In the world of invoice finance, your sales ledger is your bread and butter.

It’s a record of your sales, your invoices, and your customers’ payments. Effective ledger management is crucial for maximising the benefits for your business. It can help you maintain healthy cash flow, minimise the risk of late payments, and build strong relationships with your customers.

Financial management is the lifeblood of any successful business, so support in this area from your credit provider can be a very useful resource.

In the next sections, we’ll delve deeper into these topics, providing you with the knowledge and tools you need to make informed decisions about your business’s finances. So, stay tuned.

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FAQs

We’ve covered a lot of ground in this finance guide, but you may still have some questions.

That’s why we’ve compiled this handy FAQ section to address some of the most common queries we hear about this type of finance and how it could impact your business credit. So, let’s dive right in!

Both invoice factoring and invoice discounting are forms of invoice finance, but there are key differences between the two.

With invoice factoring, the finance provider takes over your sales ledger and manages the collection of payments from your customers.

This can be a great option if you’d rather not deal with the hassle of chasing payments and managing the financial controls of your business.

On the other hand, with invoice discounting, you maintain control over your sales ledger and the collection of payments.

The finance provider simply provides you with an advance on your unpaid invoices.

This can be a good option if you want to maintain direct communication with your customers.

One of the main advantages of this type of business finance is the speed at which you can access funds.

Typically, once you’ve set up an agreement with a provider, you can receive an advance on an invoice within 24 hours of issuing it.

This can be a real game-changer when it comes to managing your business cash flow. Funds are usually paid directly into your business bank account.

Invoice finance can be beneficial for businesses in a wide range of industries. However, it’s particularly popular in business sectors where long payment terms are common, such as manufacturing, recruitment, and B2B services.

Businesses in these sectors often have to wait a long time for payment, which can create cash flow challenges.

This depends on the type of finance agreement you have. If you have a non-recourse agreement, the finance provider assumes the risk of non-payment.

This means that even if your customer doesn’t pay the invoice, your business won’t have to repay the advance. However, non-recourse agreements are typically more expensive to reflect this increased risk for the provider.

If you have a recourse agreement, you and your business retain the risk of non-payment.

This means that if your customer doesn’t pay the invoice, you’ll have to repay the advance to the business finance provider.

Yes, most invoice funding providers offer flexible arrangements that allow you to choose which invoices to finance.

This can be particularly useful if you only want to finance large invoices or invoices from new or existing customers who typically take a long time to pay.

This gives your business the ability to closely retain management your sales ledger and invoice collection process.

Using this type of business finance doesn’t directly affect your business’s credit score.

However, it can indirectly improve your business credit score by improving your cash flow and enabling you to pay your bills on time.

Remember, a good credit score can make it easier for your business to secure other types of financing in the future, such as loans or credit cards.

That wraps up our FAQ section. If you have any other questions about this type of finance, don’t hesitate to reach out to a financial advisor or a reputable specialist business finance provider.

They’ll be able to provide you with the information you need to make an informed decision.