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Invoice financing, also known as invoice factoring, is a form of business lending based solely on outstanding invoices.
It allows business owners to access the money owed to them by customers without waiting for them to pay, essentially by using this debt as collateral against a loan from an invoice finance provider.
This can help businesses maintain cashflow and day-to-day operations without having to wait for unpaid invoices to be fulfilled, which can sometimes take weeks or months.
Once you issue an invoice to a customer, you can approach an invoice finance provider to unlock a portion of that invoice’s value
The lender will assess your application, and if approved they’ll release a percentage of the amount - usually around 90%, within 24 to 48 hours
The remaining funds, minus fees and interest, are released once the customer settles the bill
Depending on the type of invoice finance agreement you choose, either you or the lender will manage the customer relationship
There are two main types of invoice financing:
Invoice factoring, also known as debt factoring, is when the invoice finance provider buys the debt directly, making a percentage of the receivable amount – usually about 90% – available to you up front. They then collect the debt directly from the customer and pays you the remaining balance once the money is in the account – all in return for a fee and interest charges.
With invoice discounting, the provider loans you the money owed, and you repay this loan as your customers pay their invoices. You remain responsible for collecting the invoice payments, while interest charges, as well as a monthly fee for the service, still apply.
Yes, invoice financing can be a good idea for small businesses. If your business is waiting on customer payments, invoice financing can be a handy funding solution to keep cash flowing.
It gives you quick access to money you’ve already earned so you can cover running costs, take on new work or invest in growth without waiting weeks or months to be paid. It also won’t add to your debt, ideal for businesses that can’t or don’t want to borrow more.
However, you need to weight up fees, interest and any other cuts the lender might take to ensure it’s worth it. If you choose invoice factoring, you’ll also need to consider how your business will come across to your customers when they find out you’ve sold their debt.
Here are some of the benefits of invoice finance as well as things you need to keep an eye out for:
Quickly improve business cashflow by unlocking money tied up in unpaid invoices, so you can stay on top of other running costs
Invoice factoring can take the pressure off chasing payment, and many will also carry out credit checks on new clients, saving you time and admin stress
It won’t add to your debt, as you’re accessing money you’re already owed
You won’t get the full invoice amount, as the lender will take their cut in the form of a service fee and interest
Invoice financing may be seen as a risk by other lenders, so it could be harder to get funding from other sources
It’s usually only available for B2B businesses, not those that sell to the public
Handing control of debt to a lender could put strain on your customer relationships
You’ll need to demonstrate that your invoice process is reliable and your customers are creditworthy
Your business’s eligibility for invoice financing will depend on you meeting certain requirements - though these may vary depending on the bank or lender:
Lenders will likely require your invoices to be without any legal disputes, for goods or services that you’ve already provided, and not used as collateral elsewhere
They may also have a minimum or maximum number of invoices they’ll finance for you
While your business’s creditworthiness will be important, they’ll also consider your customers’ too, as they will want to be sure they can settle the unpaid invoices
Aside from invoice financing, there are other finance options for SMEs looking to raise funding:
A business loan provides a lump sum amount that the borrower must repay to the lender over a specified period with interest. This form of financing is suitable for various purposes such as expansion, equipment purchase, or working capital.
Asset finance is another funding option that involves a business leasing assets like machinery or vehicles rather than paying for them up-front. It can be less of a hassle than owning the equipment outright, and also less of a risk for the business.
We’ve partnered with Think Business to help provide companies with invoice finance and other types of business lending. Here's how to get started...
Let us know a few details such as how much you want to borrow, for what purpose and how long your firm has been trading
We’ll sift through our panel of leading lenders to show you indicative deals in just a few minutes along with any key features
Once you see a deal that might be suitable to your firm, we’ll connect you with the lender and you can make a firm application
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If you entered a factoring agreement, your finance provider will take on the responsibility of collecting the debt, but if you chose invoice discounting then it’ll be up to you. As such, it’s important to have a thorough credit control process to handle late or missed payments.
You will usually be able to access funds within 24 to 48 hours of approval.
With invoice discounting, the debt remains in your ownership so it’s less likely your customers will be aware. However, with invoice factoring your financer will be the one chasing up payments directly from the customers, so they’ll probably know.
Most invoice finance companies will let you select which invoices you want to finance - this is known as selective invoice financing. It’s unlikely you’ll be required to submit all unpaid invoices in order to qualify.
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