ACCOUNTANT FUNDING GUIDE

Invoice Finance: When Does It Make Sense for a Client?

Understand when receivables-based funding can support growth, smooth working capital or replace a constrained facility.

What invoice finance is designed to do

Invoice finance releases cash against eligible unpaid B2B invoices. Because availability can rise and fall with the debtor book, it can be particularly relevant where sales growth creates a growing working-capital requirement.

When it may fit

  • The business sells to other businesses on credit terms.
  • A material amount of cash is tied up in unpaid invoices.
  • Growth is increasing the gap between paying costs and collecting sales.
  • An overdraft or fixed loan does not flex with turnover.
  • Management wants additional headroom around payroll, suppliers or expansion.
  • The debtor book is sufficiently diversified, verifiable and collectable.

Factoring and invoice discounting

Structure Typical distinction
Factoring The funder may provide credit control and collections support, with the arrangement commonly disclosed to customers.
Invoice discounting The client usually retains control of collections. Confidential structures may be available where the business, systems and risk profile support them.

What a lender will examine

  • Customer concentration and the credit quality of major debtors.
  • Aged debtors, overdue balances and payment performance.
  • Credit notes, rebates, retentions, contra arrangements and disputes.
  • Contractual terms, evidence of delivery and rights of set-off.
  • Whether debts arise from completed and enforceable sales.
  • The quality of financial controls and ledger reporting.

Worked indication

A business has £600,000 of eligible invoices. At an illustrative 85% advance, gross availability would be £510,000. If £70,000 is held back because of concentration or other reserves, the available amount before accounting for drawings, fees and existing balances would reduce to £440,000.

The example shows why the headline advance rate is not the same as usable availability.

When it may not be the right answer

  • Sales are mainly to consumers rather than creditworthy businesses.
  • Invoices are raised well before delivery or remain subject to significant performance obligations.
  • The ledger is dominated by one customer and concentration cannot be accommodated.
  • Disputes, credit notes or contractual set-off materially weaken collectability.
  • The requirement is unrelated to receivables and is better matched to another facility.

Shadowfax view

A good invoice finance review looks at availability, concentration, service, controls, total cost and how the facility behaves as the business grows. We can compare structures on a like-for-like basis rather than relying on the headline advance rate or service fee.

Funding calculators and comparison tools

Use the figures as an initial indication, then discuss the client's circumstances before relying on a particular funding route.

Funding Calculators

Explore Shadowfax tools for estimating potential borrowing, availability and funding costs.

Explore funding calculators

Loan Comparison Tool

Compare quoted borrowing costs on a more consistent basis, including flat-rate or factor-rate facilities.

Compare loan costs

Want to discuss a client funding requirement?

Start with a confidential discussion about the business, the requirement and the options. An initial situation can be discussed on an anonymised basis where appropriate.

This guide is for general information only. Funding availability and terms depend on the circumstances of the applicant, the facility and the lender's assessment. Shadowfax Funding Solutions Limited is authorised and regulated by the Financial Conduct Authority under Firm Reference Number 937211 and is a member of the NACFB under membership number 28659.