What is invoice finance?
Invoice finance is a type of short-term borrowing that allows businesses to release their sales invoices to a finance provider and receive an advance before they’ve been paid. In many cases, businesses get themselves into debt due to late payments from clients or having to wait for the payment terms to lapse.
This can range from 14 to 90 days. By using Invoice finance, you can get the money you need almost immediately meaning you can focus on your next job.
Take a look at our infographic ‘What is Invoice Finance?’ which explains the process further.
What are the different types of invoice finance?
There are different terms for the variants of Invoice Finance in the market. Some lenders even have slight variations based on their own product. Below you will find the main categories that define the product in a little more detail. If you have any questions or need further information as to which option is best for you and your business please feel free to contact us.
Invoice finance
With invoice finance, the customer has control of collections, whereas with invoice factoring the company purchasing the unpaid invoices manages collections. In both cases, businesses can expect an advance of up to 95% on their outstanding invoices, with the finance company taking a small fee and you receiving the remaining balance after the customer has paid.
A good way to secure funds quickly
Invoice financing refers to a finance provider lending you money against your outstanding accounts receivables. The lender will advance you a certain sum up front. Then once the client pays, you’ll receive the remaining balance minus your provider’s fee.
You are in charge of collections
With invoice finance, your business is responsible for collecting any outstanding money owed to you by your clients or customers. In many cases, your invoice finance provider can sync up to your accounts receivable system so when your customer pays, they automatically deduct their fee before making the balance available to you.
This type of finance suits businesses who need access to funds more quickly so they can run their operations in a smooth manner.
Invoice Financing Example
Let’s say you’re 123 Florist supplies, a wholesaler for florists. You send a £5,000 invoice to ‘Judy’s Flowers‘ for florist supplies that you sold to her. The terms of the invoice are payment within 30 days, so she has 1 month to pay. In the meantime, you need cash flow to be healthy so you can pay your own staff, so you find an invoice financing provider for an advance. They advance you 80% of the invoice – £4,000 – up front.
Then, you have to follow up with Judy for payment, she pays within the month, using bank transfer for the full amount of £5,000. You keep £850 for yourself and send the remaining £4,150 to the invoice financing company you chose. In total, you receive 97% of the invoice value—£4,850, with invoice financing company receiving their fee of £150.
Invoice factoring
A way for businesses to gain funds by selling their invoices to a third party factoring company at a discounted price.
Your chosen factoring company will manage the invoices between you and your client. The factoring company will advance funds upfront no matter if the customer has paid or not yet.
Once the customer has paid, your factoring company will collect the debt, deposit the remaining balance to you and take their fee.
The factoring company collects the payment on your behalf
So as with invoice finance, you’ll be advanced a certain percentage of the face value of the invoice. It’s then the factors job to collect the full amount from your client.
Once collected, you’ll receive the remaining sum from your invoice amount minus the fee that the factoring company charges you for its service. Your client deals with the factoring company to make the payment, instead of you.
Positive relationships with your important customers
If you opt to use invoice factoring, you need to be comfortable with a 3rd party dealing directly with your customers. Some providers use a system so your customer is none the wiser that you’re using a company to collect payments.
They can even present themselves as a representative of your company. Factoring, however, is generally more expensive.
A partner who will chase payments on your behalf
This is due to the fact that you are passing over responsibility to the factoring company, so if the customer doesn’t pay, the factor has to deal with it. Hence why they have to charge a little more for the service.
Many businesses opt for factoring if they need to deal with a lot of customers who are on a 60 to 90 days payment contract.
It means they have the back up of another company to help them retrieve the money owed to them.
See Invoice Factoring for more information.
Invoice Factoring Example
Let’s use the same example and assume that you’re 123 Florist Supplies. So you send your invoice to Judys Flowers for £5,000 with the 30-day payment term. Again, you need your money quickly to pay your staff and overheads. So, you find an invoice factoring company who purchase your invoice and sends you £4,250 up front.
This time, instead of you chasing Judy’s Flowers for payment, the factoring company will do it on your behalf. They get in contact with Judy and she pays before the 30-day term is up, sending her money directly to the factoring company. The factoring company then deducts their fee of 4% and sends you the remaining £550. So, in total, you receive 96% of the original invoice value, that being £4,800 and the factoring company takes £200 to cover their costs.
Invoice discounting
You complete the work for your client, invoice them and send the invoice details to your invoice finance provider. The provider then makes the funds available to you almost immediately (this is a percentage of the face value of the invoice) usually within 48 hours. Once your client pays you, the remaining balance of the invoice is available for you to withdraw. The finance provider takes their service fee.
Raise your invoice and get paid quickly
This type of invoice finance is perfect for businesses who need money to move onto their next project for another client. This saves having to decline work because you don’t have the funds for materials or extra employees.
See Invoice Discounting for more information.
Selective invoice finance
Different from other forms of invoice finance as it doesn’t involve an agreement for the whole sales ledger. You only choose which invoices you’d like to have advanced. This means you keep control and have the flexibility to adjust your cash flow when needed.
Choose the invoices you want paying quickly on
In most cases, with selective invoice finance, it’s pretty common to receive 100% of the invoice advance and then pay a fee. This is ideal for established businesses who trade with reliable customers. The lender’s risk depends on your client or customer rather than your own business.
This means you can feel safe in the knowledge that invoices are being paid and you don’t have to wait around for money for weeks or months on end.
See Selective Invoice Finance for more information.
Forward finance
Forward Finance helps small businesses with a cashflow gap. If you have clients that routinely pay late, forward finance can help tide you over. This means you can get on with the running of your business rather than worrying about your cash flow.
It’s a straightforward way to raise some funds while waiting for clients to pay you. All you have to do is invoice your customer and send a copy to your finance provider.
Quick funding usually within 24 hours
In most cases, they’ll pay up to 95% of the value of your invoice upfront and within 24 hours. They’ll take their fee and then collect payment on your behalf from your client. Once payment is received, they’ll send you any remaining balances.
Perfect for small businesses who deal with a lot of different clients and need their invoices to be paid on time.
What is spot factoring
When SME businesses want to fund cash flow, they sometimes opt for spot factoring. Also referred to as selective or single invoice finance, it enables businesses to sell individual invoices at a discount to a third party. Invoices are large and upwards of £50,000 so this type of invoice financing isn’t suitable for start-ups or small businesses.
Stay in control with Spot Finance
Once the business has sold on their invoice, the spot factoring company will advance a percentage of the invoice value immediately to the business. This usually ranges from 70-85% of the invoice value.
Once the end customer has paid the invoice, the spot factoring company will take their fee and deposit the balance back to the business. This type of funding is great for businesses with a fairly high turnover who are able to sell on individual invoices.
See Spot Invoice Finance for more information.
Construction Finance
Good cash flow in construction is vital. When a business is going through various stages of a contract, they need quick and easy access to funds to stop projects from halting. With construction finance, you’ll have access to a cash advance before your invoices are paid.
Keep your construction business moving ahead
This means you’ll be able to take on more work without worrying about paying for staff or materials. When you invoice your customer, all you need to do is send a copy to your invoice finance provider. They’ll advance you the money (in many cases is 100% of the face value of the invoice). Your provider will collect the money on your behalf and then make the remaining balance available to you, minus their fee.
A great option for construction businesses as it means they can manage seasonal fluctuations and retain pay skilled workers.
See Invoice Finance for Construction for more information.
Export Finance
A little different from the finance options that we’ve already covered, export finance is a bit more specific. It allows businesses to release working capital, specifically from overseas transactions.
They are tailored to suit the business and financial needs of companies who work in export trades.
It allows companies to grow and begin to increase their trade internationally. Companies who trade overseas means it takes longer for them to be paid and their cash flow can freeze.
It can be more complicated when working with exports as you have to factor in the risks and government regulations.
There are different options to suit each sector of the export business so structuring varies from one to the other.
An Export Finance Partner who covers all areas
However, usually, the supplier will request a bank guarantee or letter of credit to secure the agreement. Thus reducing the non-payment risk once the product is shipped or delivered.
The risk with exports is not receiving payment for up to 90 days after the product has been received. Your export finance providers will receive the invoice and bridge the gap between these periods.
See Export Finance for more information.
Recruitment Finance
Great for recruitment companies who need to pay temporary or contracted workers while invoices are waiting to be paid.
You invoice your customer, send your invoice finance provider a copy of the invoice and they advance the money to you within 24 hours.
We are recruitment Finance Specialists
Some companies advance a percentage of the invoice and other companies advance the full amount. They then take care of collecting the payment from your customer and you can focus on your business.
Once the customer has paid, the remaining balance is available to you, minus the fee from the invoice finance provider. So it’s perfect for companies who need cash fast to keep their business afloat.
See Recruitment Finance for more information.
Invoice Finance Frequently Asked Questions
You are eligible if you raise invoices for clients or customers for a product or service. Eligibility factors can vary from different providers. Some only accept businesses who have a turnover of over £250,000 per year and others accept applications from SME’s.
Have all of your information to hand at the time of applying. You can make an informed decision and choose the right financial provider for you.
Unlike a traditional loan, invoice finance is an effective form of borrowing money, without feeling like you’re borrowing money. It’s an advance of the money that’s owed to you. You pay a fee to the lender to receive all of that money.
Keeping a healthy cash flow when you’re in business isn’t easy at all times. So it’s great to have an alternative route to funding that keeps your business running smoothly.
Lots of finance providers have specialised and trained teams to deal with your customers. Many find that the transaction becomes seamless meaning you get happier customers who pay on time.
Most providers assign a dedicated account manager to deal with your business. You can also have real-time access to your account to see what funds are available to you and withdraw.
Selective Invoice Finance providers can work on a pay as you go method or contract. Some providers offer a trial period for a contracted service. For a continuous invoice finance facility, it’s common to be on a six month or yearly contract.
Many businesses find it hard to gain funding such as traditional lending from the bank. You are not judged on your historic financial performance but the ability to make sales and retain customers.
You’re in control of how many invoices you submit so you know how much could be eligible for the advance. This means you can predict your cash flow for the coming months.
Most invoice finance providers offer Bad Debt Protection. This safeguards you and your business against any potential losses caused by a customer not being able to pay. Make sure it’s one of their priorities as you’ll need it if you find yourself with a problematic customer.
Lots of finance providers have specialised and trained teams to deal with your customers. Many find that the transaction becomes seamless meaning you get happier customers who pay on time.
Some providers have no setup fees and only take a finance fee once they have secured payment from your customer. Other providers charge a setup and service fee for outstanding invoices. When researching providers, you’ll want to know what costs are involved for the duration of your contract.
If you have raised an invoice to your customer in the early months of your start-up then you will be eligible for this type of funding. If you are at a pre-revenue stage you won’t be eligible until you start billing your customers. However, there are lots of providers who offer other forms of business finance to start up businesses, you just need to find out if they are the right fit for you.
Providers need to make their checks before opening an account, but if you sail through the process, you could open your account within ten days and start receiving advances after sending over your first invoice.
The Financial Conduct Authority (FCA)
The FCA is an independent, non-governmental body that regulates the UK financial services industry. They regulate many products within the business finance industry, but currently they do not regulate invoice finance.
UK Finance (formerly ABFA)
UK Finance recently integrated Asset Based Finance Association (ABFA) into their new trade association, representing more than 300 UK credit providers, including invoice finance companies. All Invoice Finance and Asset Based Lending (IFABL) members adhere to standards and code of practice.
