What is invoice finance?
Invoice finance is a way for businesses selling their goods or services to other businesses to borrow cash using their outstanding sales invoices (or accounts receivable) as security.
Your unpaid sales invoices (debtors) are an asset; provided you are selling to good quality customers and the invoices are going to get paid, they are of value to a lender as security or collateral for a loan.
An invoice financing provider will effectively purchase the invoices from you and make an initial advance (which can be up to 95%) against the value of them.
The primary benefit of invoice finance is that it improves business cash flow - there are other benefits too, but the main reason companies choose to use invoice finance is to increase working capital.
Invoice finance provides an immediate cash injection
Your existing debt - whatever is owed to you by your customers on the day you start using invoice finance - will provide you with access to an immediate injection of cash.
Invoice finance improves cash flow
Invoice financing really comes into it’s own as a method of improving your business cash flow.
How long do you usually have to wait for your customers to pay?
30, 60, 90 days - even longer?
With invoice finance, you receive up to 95% of the total value of each of your invoices within 24 hours of the invoice being raised.
So instead of waiting for 58 days for your cash, you will have access to a significant portion of it almost immediately.
And because the amount you can borrow is directly linked to your sales, there are no restrictions on how much you can grow your business.
If your sales increase, the amount of funding available to you increases too - because with invoice finance, funding is always directly proportionate to sales.
The Different Types of Invoice Finance
There are two main types of invoice finance in the UK - invoice factoring and invoice discounting.
And in recent years, there has been significant growth in invoice trading - based on the principle of peer-to-peer lending, which enables you to sell individual invoices for short term cash flow needs.
All three types of invoice finance improve working capital by releasing the cash that is tied up in unpaid sales invoices, but there are some important differences in how each solution works and the type of business it is suited to.
Invoice Factoring
When you factor your invoices, the lender (which can be a bank or independent company) also takes on responsibility for collecting the debt from your customers.
Your customers will be aware that you are using invoice finance because they will have to pay the factoring provider directly.
Invoice Discounting
Invoice discounting, on the other hand, is a completely confidential facility.
You retain control of your sales ledger, send monthly statements and chase payment in the usual way.
The invoice discounter simply lends you the cash you need (at the agreed advance rate) when you need it.
Invoice Trading
Invoice Trading is still a relatively new concept, but it is popular - especially with new start and smaller businesses.
The basic principle of it is exactly the same as traditional invoice finance but with a couple of significant differences.
Firstly, it enables you to raise funds against one invoice at a time - it is selective, rather than whole turnover and you are are not tied into a lengthy contract with the lender.
The other significant difference is the source of funding.
Whilst traditional invoice finance providers are banks and well established financial institutions, invoice trading platforms are generally funded by private investors.
Who is invoice finance for?
Effectively, any business selling to other businesses on credit terms is eligible for invoice finance.
It is particularly well suited to businesses operating in the following types of industries:
Manufacturing
Engineering
Transport
Recruitment
Printing and publishing
Wholesale
Security
Professional services
Download our free guide
For a more detailed overview of invoice finance, download our free report - The Definitive Guide To Invoice Finance.