Invoice financing 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 financing tool for businesses whose growth is hampered by slow payment of invoices.

The main forms of Invoice finance are:

  1. Invoice Factoring
  2. Invoice Discounting

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

Understanding Invoice Finance

The growth of Invoice Financing

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 growth?

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%. 

Benefits of Invoice Financing

  • Invoice financing is 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.

What is Invoice Factoring and how is it used?

Factoring allows businesses to sell their unpaid invoices (also known as ‘accounts receivable), for a percentage of their value. This offers instant improvement of working capital and can be easier to arrange than some forms of business funding because the lending institution is primarily interesting in the credit rating of the company which owes the invoice, than the one factoring. 

What is Invoice Discounting?

Discounting works in a similar way to factoring: accounts receivable are sold for a percentage of their value. However, factoring means your client will be alerted to the presence of a financial arrangement, whereas discounting is usually confidential. You’ll collect the invoice yourself in the usual fashion, so there’s no chance of client concern or questions. Read more about discounting here.

If you would like us to do the work for you or if you need advice, call 08000 24 24 51, or email info@businessexpert.co.uk.

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

Invoice finance

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