August 10, 2022
4 mins

Invoice Finance: Key Features and Benefits

Key take away points:

  • How does invoice financing work?
  • Types of invoice finance
  • Why use an invoice finance facility?
  • Things to consider

Why Use Invoice Finance?

Invoice finance can ease cash flow problems by enabling you to get paid faster for completed work, meaning you can carry on growing without being held back by your finances. Rather than waiting days or weeks for your invoices to be paid by customers, an invoice finance facility means that lenders will advance you most of the value of the invoice immediately.

How does invoice financing work?

Invoice finance is a collective term for the various types of invoice based lending such as invoice discounting, selective invoice discounting, invoice factoring and spot factoring. 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.

The concept for invoice finance is simple. When you raise a customer invoice, you do not need to wait for days, weeks or months for them to pay it. Instead, you also send the invoice to a lender. The lender will advance you up to 95% of the value of the invoice straight away.

This means that you will get paid faster, boosting your cash flow and enabling you to focus on running your business.

When the customer has paid their invoice, you repay the lender. There will be interest and/or a processing fee to pay the lender for their service.

Types of invoice finance

There are two types of invoice financing: invoice factoring and invoice discounting.

Both facilities can give businesses more control over their finances, but the key difference to keep in mind is whether you want to be able to control the invoicing process for your business or have the lender take care of it for you.

Invoice factoring

With an invoice factoring facility, the lender provides a ‘credit control’ functionality on your behalf, chasing late payments and performing credit checks on potential customers so you can concentrate on running your business. In this scenario, your customers will know you're using a factoring provider. This option is often better suited to younger businesses or those with a smaller turnover.

Invoice discounting

With an invoice discounting, you maintain credit control which means you can manage your client relationships. This is a more time-consuming approach as you will need to chase payments yourself. Invoice discounting is generally available to more established businesses with higher turnover.

Selective or spot invoice finance

If you choose either an invoice discounting or invoice factoring facility, you will be asking a lender to deal with all your customer invoices. This all or nothing solution may not be right for every business, but there is an alternative in the form of spot or selective invoice finance.

The selective product enables you to choose which invoices you want to finance and which you would like to manage as normal. This ad-hoc strategy might be more suitable if you only want to finance certain types of customers or those that regularly take a long time to pay.  

Why use an invoice finance facility?

As with any commercial finance product, there are both pros and cons to consider. Some of the advantages of choosing either an invoice factoring or invoice discounting facility are:

  • Quicker access to cash as it will be available from the lender as soon as the invoice is raised. This cash can be used to grow your business, invest in stock, or cover operational costs.
  • Invoice finance provides a quicker turnaround than other forms of finance such as loans.
  • Invoice finance is an unsecured finance product so your assets will not be at risk.
  • Invoice discounting can help convert credit sales into cash enabling quicker growth and development in a shorter amount of time.

Invoice finance: Things to consider

  • Only suitable for B2B: Invoice financing is only available on commercial invoices meaning your customers have to be other businesses, not the general public.
  • Managing client relationships: If you choose to apply for invoice factoring, then chasing payments will be out of control to an extent. This means your client relationships could potentially be a risk of damaging these relationships.
  • Long-term costs: Whilst invoice financing can be a great short-term solution for cash flow, there may be processing fees and interest to pay which can add up over time.

Example of invoice factoring in action

Gemma, owner of Smart Interiors Ltd, is about to start a big new office fitout project. Gemma 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.

Gemma is owed £10,000 by a previous client for a completed project, but the invoice has payment terms of 30 days. Gemma agrees to an invoice finance deal that will give her 85% of the invoice up-front, with total fees and charges at 3%.

  • Invoice value = £10,000
  • Advance amount (85%) = £8,500
  • Fees (3%) = £300

When Gemma sends the invoice to the lender, she receives an advance of £8,500 within a couple of days. Then, when the customer pays the invoice, the full £10,000 goes into a bank account controlled by the lender.

Gemma gets the remaining value of the invoice (£1,500) minus the lender’s 3% fee (£300), so she receives £1,200.

Interested in an invoice finance facility for your business?

We can help businesses to by obtaining the best funding options and facilities, quickly and efficiently, whilst ensuring your short-term goals and long-term ambitions are considered in your financial strategy.

If you are interested in an invoice finance facility, get in touch with us today. We will assess your business’ individual circumstances and work with you to decide if invoice finance or another finance solution would be the right choice.

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