Invoice Finance: The Complete Guide


August 11, 2022

What is Invoice Finance?

Invoice Finance is a type of working capital facility used by many businesses to unlock cash tied up in outstanding invoices. Rather than waiting 30-90 days to be paid by a customer, invoice finance facilities decrease the gap between an invoice being raised and actual cash flow, with some businesses advancing up to 95% of the invoice value in a matter of days.

Invoice finance allows the business to reinvest working capital back into operations, growth, suppliers and so on. As many business owners know, an efficient working capital cycle is fundamental to success.

Invoice Finance allows a business to borrow funds against the amount due on outstanding invoices issued to your customers. In turn, this allows the business to collect capital tied up in invoices immediately, without having to wait for customers to pay in full. This helps the business avoid cashflow difficulties. 

What Businesses are Eligible for Invoice Finance?

Invoice finance is suitable for any business that trades with other businesses on credit.

When the business issues an invoice to the customer the lender will advance a % of the gross invoice value (typically between 75% and 95%) with funds being available within 48 hours on average. The customer will pay the invoice into a trust account held in the business’s name, but controlled by the invoice finance provider. The lender then deducts their interest and fees and the balance is transferred into the current account for business. 

What are Invoice Finance Products?

There are various types of Invoice Finance based products.

The most common types are

  • Invoice Factoring
  • Invoice Discounting
  • Selective Invoice Finance
  • Spot Factoring 

Comparing Invoice Finance Products

Invoice Factoring

  • The Invoice Finance provider takes the responsibility for the collection of the business’s invoices
  • Many factoring products have credit control services included as part of the cost package
  • The business’s customers will be aware they are using a factoring provider to factor their invoices.

Invoice Discounting

  • Discounting allows the business to be in control of the collection of invoices from their customers.
  • Credit control services are not included as part of the cost package
  • The provider doesn’t have direct contact with businesses customers, making it a more discreet option.
  • The business’s customers will believe they are paying the business rather than an invoice finance provider. This is often called Confidential Invoice Discounting. 

Selective Invoice Finance

  • Allows the business to pick and choose which customers/invoices the business wishes to factor.
  • Can be used for particular customers where payment terms might be significantly longer than with other customers.

Spot Factoring 

  • A facility that is used for a one-off invoice with a view of not using the facility again. 

What Are the Advantages of Invoice Finance? 

  • Faster access to cash – one of the main advantages of using invoice finance is reducing the time it takes to receive cash tied up in invoices. Rather than waiting 60 days to be paid from your customer, you can receive a large percentage of capital within 48 hours. 
  • Flexibility – the funding limit is dictated by the value and quantity of your invoices, as the business grows the invoice finance line increases with your revenue. 
  • Stable Cash Flows – advancing cash tied up in invoices allows for increased stability in working capital cycles, therefore providing higher power for stock purchases and business growth. 
  • Security – Invoice Finance uses the outstanding invoices for collateral rather than other assets owned within the business or by the directors personally. Thus, allowing businesses that are light on tangible assets access to working capital based lending. 

What Are the Downsides of Invoice Finance? 

  • Customers know there is an arrangement in place – your customers will be aware that an invoice factoring facility is in place, as the invoice finance provider will be collecting payments from your customers directly. Sometimes, this damages the relationship you have built over time with your customers. 
  • Cost – for some businesses invoice finance can be cheaper than alternative working capital solutions. However, costs can significantly increase depending on the business’s financial situation, industry and the creditworthiness of the customers you trade with. 
  • Your customers must be other businesses – Invoice finance is only suitable for businesses that offer products or services to other businesses rather than the general public.  

How Much Does Invoice Finance Cost? 

Invoice finance facilities typically come with monthly costs. The main costs to look out for include: 

  • Service Fees – this is the cost of having the facility in the first place, normally calculated as a percentage of the business’s turnover. This covers the day-to-day running of the facility. 
  • Discounting Fees – this is the actual cost of borrowing itself. For each advanced invoice, the business is charged an interest cost for factoring in the invoice. 
  • Other charges – credit management fees, credit protection fees, arrangement fees and renewals fees. These all vary depending on the type of facility and size of the business. 

Is Your Business Eligible for Invoice Finance?

  • Your business invoices other businesses (not direct consumers) 
  • Your business can be a start-up, growing or well established
  • Your business has a minimum of £10,000 in outstanding invoices 
  • If you need to release cash tied up in unpaid invoices – your payment terms are typically longer than 14 days. 
  • If your business exports, many invoice finance lenders can support domestic invoices as well as export invoices.

Provide’s team of financial experts can help you go over your options for invoice financing products. We understand it can be overwhelming choosing the option that is best for your business, which is why our platform was made to help you sort through over 200 lenders to find that one that’s right for you.

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