Invoice finance is a way of borrowing money based on what your customers owe to your business. Invoices awaiting payment represent money that will be paid to you, subject to your payment terms, which could be anything from 14 days to 90 days or more. Invoice finance gets you most of the money you need immediately, so you don’t have to wait to get paid.
Quite simply, rather than waiting days or weeks for your invoices to be paid by customers, lenders can advance you up to 85% of the value immediately. This allows you to get paid faster for completed work, so you can focus on running your business.
Paul’s Kitchens Ltd has a big new project coming up. Paul knows he’ll need to pay for extra materials and take on another member of staff to do this new job, and he’ll only get paid when it’s finished.
Paul is owed £30,000 by his previous client for a completed project, but the invoice has payment terms of 30 days. Paul agrees to an invoice finance deal that will give him 75% of the invoice up-front, with total charges at 3%.
Invoice value = £30,000
Advance amount (75%) = £22,500
Fees (3%) = £900
When Paul shows the invoice to the lender, he receives an advance of £22,500 within a couple of days. Then, when the customer pays the invoice, the full £30,000 goes into a bank account controlled by the lender.
Paul gets the remaining value of the invoice (£7,500) minus fees (£900), so he receives £6,600.
All invoice finance operates under this principle, but there’s a variety of different products available.
Types of invoice finance:
Invoice discounting (Confidential & Disclosed)
It’s a good fit for businesses who know what they need to borrow and do not typically have assets to secured any additional funding. Whatever facility you choose, invoice finance can be a great way to improve your cash flow situation.
Invoice Factoring is where the lender is closely involved. They will provide ‘credit control’ services to ensure your customers pay within the agreed terms, which might be exactly what you need; which allows you to focus more on your business, instead of chasing late-paying customers.
- The lender handles collecting payment from your customers
- Your customers will have the knowledge you’re using a factoring provider
- Factoring providers will credit check potential customers for you
- Can be slightly easier to secure for small or early-stage companies
Invoice Discounting is the most straightforward form of invoice finance. There is more control for the business using the facility and is generally only available to more established businesses.
Unlike factoring, there are two additional options; whether to use a confidential or disclosed facility. If you choose “Confidential” discounting you’ll still have to do your credit control to ensure customers pay on time and fulfil the normal credit control functions, your customers won’t have sight of your facility. If you choose “Disclosed” discounting, it works similarly to factoring but only in the credit-control functions.
There are also additional Adhoc invoice finance facilities which are known as Selective invoice finance and spot factoring
These products differ slightly from factoring and discounting and that’s 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 Adhoc approach, and get funding when you need it.