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What is Invoice Finance and How Can it Benefit Business Cash Flow?

Invoice finance is a general term to describe a range of asset-based finance facilities, whereby businesses sell their accounts receivable (invoices) to a third party for a percentage of their value.

It’s a useful facility for businesses whose growth is hampered by slow payment of invoices.

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Types of Invoice Finance

There are two main forms of Invoice finance and they are:

  1. Invoice Factoring
  2. Invoice Discounting

Did you know that you can get up to three times more cash with invoice finance than traditional forms of funding? And that your borrowing power grows along with your turnover?

How Does Invoice Finance Work?

  1. You continue your business as usual and invoice your clients/customers
  2. You then pass the invoice details to the agreed invoice finance provider
  3. The provider pays you an agreed percentage (this varies per company), often within only 48 hours.
  4. Depending on the agreement, you will chase the payment as usual if that is necessary, or the provider will do that for you.
  5. You receive the remainder of the invoice amount once the invoice is paid, minus any agreed service fees.

How Much Does Invoice Finance Cost?

Since invoice finance is currently unregulated in the UK, you need to be careful to understand all of the costs, fees and charges levied by the providers, and especially to avoid hidden fees.

The basic invoice factoring and discounting charges are as follows:

Service Charge

This catchall term covers management, collections and administration costs, and is charged as a percentage of your company’s gross turnover. Typical rates run at between 0.75 and 2.5%.

Discount Charge

Similar to the interest payments on a business loan, the discount charge or fee is levied on the money you draw down. Averaging between 1% and 3% over base rate, the discount charge will be calculated daily following the advance of the money. This means you will be charged more if your customer takes longer to pay.

DIscount charges are paid either weekly or monthly, depending on the preferences of the lender.

Read our longer article on invoice finance costs here.

Who Should Consider Invoice Finance?

The basic requirements and eligibility for invoice finance are as follows:

  • Your business trades with other businesses (not consumers)
  • You are a limited company or LLP.
  • You offer industry standard credit terms
  • Some lenders have a minimum monthly invoices sent per month requirement
  • Minimum turnover of £50k

Is Invoice Financing a Good Idea?

The essential benefits of invoice finance are as follows:

  • Invoice finance solutions are more flexible than business loans or overdrafts.
  • Decisions to lend against invoices can often be made faster.
  • The funding grows in-line with the company’s turnover.
  • Typically, you get a greater level of borrowing against the assets.
  • Can help to reduce the risks of late payments or defaulted invoices

What is the Difference Between Invoice Financing and Factoring?

Invoice finance is the broader name for the whole sector of the finance industry focussed on accounts receivable finance.

People often use invoice finance interchangeably with invoice factoring which is the process of selling unpaid invoices to a ‘factor’ for a proportion of their value.

What is Single or Selective Invoice Finance?

Just as some invoice finance providers cover the whole sales ledger, it is also possible to arrange it for a single invoice.

Sometimes called spot factoring, single or selective invoice discounting this facility is ideal for businesses who rely on fewer invoices of a larger value. In this situations late payment can put an otherwise profitable business into a critical situation.

Read more about selective invoice discounting, or spot factoring.

Is Invoice Finance Regulated in the UK?

Currently, the asset based financing industry is not regulated by the Financial Conduct Authority (FCA) in the UK.

Because of this borrowers should exercise all due diligence when it comes to researching potential providers. Pay particular attention that:

  • you’re not being tied into a contract of longer than 12 months
  • that all applicable fees are clearly stated
  • the contract should include a clear termination clause
  • Termination fees should never exceed 2 months minimum service fees

Bad Debt Protection

Bad Debt Protection is a credit control bolt on which you can add to an invoice finance facility. A form of trade credit insurance, this means that the factor assumes responsibility should your client default on their invoice.

As part of an overall credit management facility, it can be useful, especially for businesses in high risk areas. It is also possible to apply bad debt protection to a specific invoice.

Learn more about invoice protection or credit insurance.

The Growth of Invoice Finance

While invoice financing has been around a while, it is only in the last five years that its popularity has exploded as a viable method to fuel growth and maintain a healthy level of cash flow. As banks tightened their belts in 2008, the number of businesses using invoice financing increased by more than a third (48,903 to 67,676).

Since the turn of the millennium, the invoice finance industry has grown by 368%. There are providers ranging from small independent lenders who operate locally, to the subsidiaries of large multi-national banks.

Why has Invoice Financing Achieved Such Success?

There are some reasons, but a key driver is an increase in the number of late paying companies. The total amount of unpaid invoices is around £67.4bn, and this amount has been rising year on year for some time. It’s more common now for the larger companies to use smaller companies cash-flow to support their own. This theory seems to have some credence when you see that 22% of all late paying invoices are formed large companies. The habit started in the recession and had been continued since then.

Experian reports that between Q2 2014 and Q2 2015 the percentage of SMEs waiting for payments longer than 30 days increased by 9%. 

What is Import Invoice Financing?

Import invoice finance helps businesses overcome some of the challenges of trading overseas. When a company has to pay out for goods significantly in advance of them being delivered, the time-delays can place immense strain on working capital. This specialist form of finance effectively speeds up the payment cycle by allowing the importer to raise capital before actually receiving the goods. Read our full article in import invoice finance here.

Is it Appropriate for Small Businesses?

Unlike traditional forms of finance which require established trading records and credit ratings, invoice finance is a form of alternative finance which is ideal for small businesses and startups.

In assessing risk, the factoring company is primarily investigation the credit history of the companies owing their invoices. While preferential rates are available to businesses who do have solid credit in place, and a positive business reputation, the basic mechanism whereby factoring can improve the cash-flow cycle works exactly the same for any size of business.

Which are the Best Invoice Finance Companies?

We have asked every single one of our providers to create some content outlining their strengths. We hope the following will prove useful to help you research your decision. You can read the article here.

We have produced this infographic to help you understand the process.

Invoice finance

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