Invoice Finance

What is Invoice Finance

If you regularly invoice businesses, you could be eligible for invoice finance — one of the best ways to ease cash flow problems and get paid faster for completed work.

Invoice finance is an increasingly popular way for businesses to increase their cashflow. In one form or another it has been around a long time – 4,000 years according to one source1. So, as a method for improving working capital, invoice finance has been tried and tested. And it can work very successfully, but what is it and how does it work?

Through invoice financing, a lender will ‘purchase’ your outstanding invoices so you can move on with your business. You don’t have to wait for the standard payment term to elapse but instead you’re free to pay your suppliers, buy in more stock or invest in new avenues of business.

Invoice finance is a way of borrowing money based on what your customers owe to your business. Unpaid invoices represent money that will be paid to you, but you have to wait for the payment terms to elapse, which could be anything from 14 days to 90 days or more. Invoice finance gets you most of the cash immediately, so you don’t have to wait to get paid.

The concept is simple — rather than waiting days or weeks for your invoices to be paid by customers, lenders advance you most of the value immediately. That means you get paid faster for completed work, so you can focus on running your business.

Invoice Finance Example

ACME Manufacturing Ltd has a big new job coming up. The company knows it will need to pay for extra materials and take on another member of staff to do this new job, and will only get paid when it’s finished. The business is owed £15,250 by another client for a completed job, but the invoice has payment terms of 30 days. ACME Manufacturing Ltd agrees an invoice finance deal that will give them 85% of the invoice up-front, with total fees and charges at 3%.

  • Invoice value = £15,250
  • Advance amount (85%) = £12,963
  • Fees (3%) = £458

When the company notifies the full invoice value to the lender (£15,250), the company is then able to receive an advance of £12,963 within a couple of minutes. Then, when the customer pays the invoice, the full £15,250 goes into a bank account controlled by the lender. ACME Manufacturing Ltd gets the remaining value of the invoice (£2287) minus fees (£458), so receives £1829. All invoice finance operates under this principle, but there’s a variety of different products available.

Types of invoice finance

  • Invoice discounting
  • Invoice factoring
  • Selective invoice finance
  • Spot Invoice Finance

Below we will look at some general things to consider about invoice finance.

Which type of invoice finance is right for my business?

One of the key things to consider with invoice finance is: how much control do you want? Once you know the answer to that question, you can get more specific about the terms and conditions you’d prefer. Let’s take a closer look at the key product categories within invoice finance:

Selective invoice finance and spot factoring

These products differ from factoring and discounting because they aren’t full-facility products. In other words, you can choose which invoices you’d like to finance, and deal with the rest as normal. Selective invoice finance allows you to choose specific customer accounts to finance, while spot factoring allows you to choose specific invoices. Either way, you can take a more flexible ad-hoc approach, and get funding when you need it. It’s a good fit for businesses with a clear idea of how much money they need, but can be more difficult to secure than factoring or discounting. Whatever facility you choose, invoice finance can be a great way to improve your cashflow situation.

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