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.

Types

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 finance than traditional forms of funding? And that your borrowing power grows along with your turnover?

Understanding Invoice Finance

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 provider of invoice finance

(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.

Benefits 

  • 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.

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.

What is Invoice Trading?

Invoice Trading, also known as peer-to-peer lending allows businesses to auction their invoices online as a way of raising fast capital to improve cash flow. It has particular advantages for businesses trading internationally because, since the online trading platforms are used by investors from all over the world, savvy trading can fund invoices due to foreign debtors with ease. Read our full article on Invoice Trading.

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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