Invoice Finance FAQs: All you need to know about invoice finance
Invoice finance is used by tens of thousands of businesses across the UK to maintain a healthy cash flow and access the funding they need to achieve a wide range of objectives.
So how does it work, what are the variations, and is your business eligible?
Here we answer all of your frequently asked questions about invoice finance.
If you don’t find the answers you’re looking for here, or you’re interested in exploring how invoice finance could help your business and how to find the most suitable facility, our expert team is always happy to help.
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Invoice finance overview
Invoice finance is a flexible funding solution that enables businesses to access up to 90% of an invoice’s value within 24 hours of its issue, thereby avoiding the cash flow challenges that trading on credit terms can create.
Once the customer has paid, the remaining balance is transferred to you by the invoice finance company, minus their fees.
Whilst the different variations of invoice finance work in slightly different ways, the main process remains the same:
- Your business raises an invoice
- The invoice finance company advances up to 90% of its value within 24 hours
- The customer pays your invoice
- The remainder of the invoice value is made available to you, minus fees
There are so many reasons businesses use invoice finance. Here are just a few:
- To improve cash flow by bridging the period between paying suppliers and getting paid
- More flexible than other types of funding, as the amount you can access grows with your sales ledger
- Good for businesses with limited trading history
- Can include additional services such as credit control and debtor protection
- Cannot be recalled on demand
- Can be tailored to suit the individual needs of your business. For example, you can raise funding against single invoices rather than your entire sales ledger.
As with all funding products, invoice finance is not a one-size-fits-all solution:
- It’s better suited to certain industry sectors
- Only suitable for those trading B2B and on credit terms
- Creditworthiness of customers is an important consideration (although this can also be a benefit!)
Invoice finance is a great option for many businesses due to the benefits it offers. Plus, it can be tailored to suit the individual needs of different businesses.
However, when it comes to any form of business finance facility, there is not a one-size-fits-all solution. Therefore, you should always explore the options available to your business to ensure you secure the most suitable facility.
As an independent commercial finance broker that specialises in invoice finance, we have more than two decades’ experience of reviewing businesses’ specific requirements and identifying the most appropriate funding facilities and lenders.
Accessing invoice finance
Although invoice finance is better suited to certain industry sectors, if your business sells to other businesses and on credit terms, you should be suited to this method of funding.
It’s particularly useful for:
- Fast-growth businesses who need ongoing access to cash
- Seasonal businesses
- New-start businesses
- Small businesses
- Companies with unfavourable credit histories
The amount of funding you can release against your sales ledger will vary depending on your sector, the product selected and the invoice finance company.
Typically, up to 90% can be advanced within 24 hours, with the remainder (less the funder’s fees) forwarded when the customer pays.
Use the tool below to get an instant indication of the funding your business could generate with invoice finance, and discover which facility would be most suitable for your business.
A whole host of banks, independent funders and invoice finance companies offer invoice finance products.
Although the roots of invoice finance can be traced back more than 5,000 years, it has been widely used in the UK since the 1970s and it has been embraced globally over the years due to its unique ability to satisfy a key business need – cash flow.
The choice available to businesses in the UK has grown substantially in recent years, with new players entering the market and lenders diversifying the different types of products available.
With so many lenders and variations of invoice finance to consider, it’s important to do your research to ensure that you are getting the most suitable solution for your needs.
Many invoice finance companies, for example, will specialise in supporting businesses in certain industries and are therefore familiar with the day-to-day challenges you may be facing.
Bear in mind too that lenders use different structures, fees and terminology, so it can be useful to seek help comparing your options and finding the right invoice finance company for your business.
As a commercial finance broker which specialises in invoice finance, our experienced team can talk you through all of the different options and match your requirements with the most suitable invoice finance companies on the market.
Invoice finance is popular with new businesses because funding is secured against your debtors and the quality of the outstanding invoices rather than your trading history, which many new businesses will not have.
Typically, new-start businesses will be more suited to invoice factoring. As well as the funding element, factoring provides a dedicated sales ledger management service. This provides additional expertise and reduces the resource burden on new and growing businesses.
Invoice finance brokers are experts at matching businesses’ unique funding requirements with the most suitable facilities and funders on the market.
With the aid of a vetted panel of lenders, they’ll be able to introduce the best options for you and work with you not just to secure the facility, but also to provide ongoing support once the facility is underway.
With the help of a broker you can:
- Save valuable time and resource by benefiting from their commercial finance expertise, rather than having to research all the options yourself
- Navigate the commercial finance market to find facilities that tick all the right boxes
- Access decision-makers across a wide range of banks and independent funders
- Secure a funding facility tailored to your needs
- Benefit from their support even after the facility is live, ensuring it continues to work for your business
Using invoice finance
This depends on the invoice finance product and provider you choose.
With invoice discounting, facilities are typically provided on a confidential basis, as your business will continue the credit control function in-house.
Factoring facilities are usually ‘disclosed’, which means your customers will be aware of the funder’s involvement.
However, both facilities can be provided on a confidential or disclosed basis.
Although up to 90% can be advanced with invoice finance ahead of customers paying, this figure can be lower for certain sectors.
This is commonly the case in sectors that present more of a risk to the invoice finance company, for instance where underpayment or the risk of customer insolvency is higher than in others.
However, it can vary from funder to funder, so it’s important to compare the market and find a funder that understands your business and its sector to get the best possible facility and level of service.
In the past invoice finance was typically secured across the entire sales ledger, ensuring businesses could access as much cash as possible.
While that is still an option, nowadays it is possible to be more selective over which invoices you choose to fund. Selective turnover facilities are common, and it’s also now possible to fund individual invoices.
Yes, with single invoice finance it is possible to secure funding against individual invoices rather than your entire ledger.
This is a really useful feature of invoice finance, and enables businesses to release cash against invoices which are of a particularly high value, or those supplied on longer-than-usual credit terms to help with short-term cash flow requirements.
There is no reason why using invoice finance should damage your customer relationships.
While invoice discounting, for instance, sees your business retain your credit control function in-house, factoring companies will collect payment from your customers professionally.
If you are worried about your customers knowing you’re using invoice finance, facilities can be provided confidentially (subject to status) and your customers won’t be aware of the funder’s involvement.
Types of Invoice Finance
Invoice discounting is a type of invoice finance facility that helps businesses to maintain a healthy cash flow by advancing up to 90% of an invoice’s value within 24 hours of the invoice being raised.
Crucially, with invoice discounting the sales ledger management function remains the responsibility of the client, making it great for companies where this process is already running smoothly and when you would prefer to retain full control of your client relationships.
Facilities are typically provided confidentially, can include bad debt protection, and are typically suited to businesses with an annual turnover of more than £1 million.
Invoice factoring is a type of invoice finance facility that helps businesses to maintain a healthy cash flow by advancing up to 90% of an invoice’s value within 24 hours of the invoice being raised.
Where it differs to invoice discounting is that factoring typically includes a dedicated sales ledger management service. Through this the invoice finance company assumes responsibility for this vital function and removes the burden from the client.
Facilities can additionally incorporate bad debt protection and are typically suited so smaller or less-established companies.
Invoice discounting and factoring both aim to boost your cash flow by releasing cash against the value of unpaid invoices.
The main difference between them is that factoring also comes with a dedicated sales ledger management service. The credit control expertise this brings can help to reduce in-house overheads and improve collection times.
This makes factoring particularly useful for smaller businesses, whose resources would be better spent on core activities.
In contrast, with invoice discounting the client retains its credit control function in-house and with it the responsibility for collecting payments.
Both products can additionally incorporate bad debt protection to safeguard your cash flow against late payment and protracted default.
Single invoice finance offers businesses the option to release funding against the value of individual invoices.
It can be ideal for businesses that need to overcome a short-term cash flow shortage. It is typically useful when raising invoices that are of high value or on long credit terms.
With an invoice finance facility at its core, asset based lending facilities give businesses the ability to unlock additional funding against the value of other assets, including plant and machinery, stock and property.
This makes it an ideal solution for more established businesses wishing to finance growth – for instance through management buy-outs, management buy-ins, mergers and acquisitions – as well as those who are looking at refinancing.
Invoice finance fees and charges
This depends on a number of factors.
For instance, the business’s turnover, their sector and the level of risk posed to the funder will all be considered. Plus, whether the facility includes a sales ledger management service and/or credit protection.
Different funders will also have different costing models and matrices.
Use the tool below to get an instant indication of the amount of funding you could release with invoice finance and the approximate cost, and discover which facility could best suit your business.
Most facilities are individually priced depending on your business and the facility you choose. But typically, invoice finance facilities consist of two main fees: The service fee and discount charge.
The service fee covers the day-to-day running of the facility, and is usually charged as a proportion of turnover.
The discount charge, meanwhile, is charged against the amount of borrowing. This is usually accrued daily, deducted at month-end, and above bank base rate.
If your facility contains bad debt protection, the fee for this element is typically charged as a portion of turnover (or the turnover of selected debtors) to protect the business against the risk of bad debts, and is subject to approved and designated credit limits.
Some facilities might instead have a composite fee structure. This combines the service and discount charges into a single facility fee, which is calculated as a proportion of turnover.
The service fee covers the ongoing cost of running the facility. In some cases, this can include the cost of credit control and bad debt protection. However, these are often separated for additional clarity.
This fee is usually calculated as a percentage of turnover. However, it can vary according to the value and volume of invoices you put through the facility.
The discount charge is based on how much money you borrow using the facility, or ‘funds in use’. Accrued daily but deducted at month end, it is usually a percentage above base rate and varies between funders. Some funders operate a minimum base rate, which is over and above base.
Some invoice finance facilities such as recruitment finance, where the factoring company additionally provides back office and administrative support, might use a composite fee structure.
In this case, the service and discount charges are effectively combined into a single facility fee, which is the ongoing cost of running the facility and calculated as a proportion of turnover.
Typically, invoice finance costs are calculated based on the volume of invoices to be financed and the collectability of these invoices.
To quantify these values, the invoice finance company may consider:
- How much you will be financing
- The size of each invoice
- The value of any outstanding invoices
- Your business niche and industry
- Your business reliability, longevity and turnover
- The characteristics of your clients
- Typical payment times
Whilst this offers a rough guide, it’s worth remembering that different invoice finance companies have varying appetites and will put a different weight on each of these criteria.
Therefore, it is wise to find a funder who fully understands your business and its needs to access the best rates and service for your requirements.
Get an instant quote
Use the tool below to get an instant indication of the funding your business could generate with invoice finance, and discover whether factoring or invoice discounting would be most suitable for your business:
Still have questions?
If you still have questions about invoice finance, how it works or whether your business could benefit, we could help.
As an independent commercial finance broker that specialises in invoice finance, we have extensive knowledge of the product and providers and would be more than happy to discuss any questions you may have.
And, with wider knowledge of the finance market, if invoice finance isn’t the right fit for your business, we can help you identify and secure the funding product most suited to your requirements.