Invoice finance

Invoice finance is a way of borrowing money using your unpaid invoices. If you’ve issued invoices to your customers and these haven’t yet been paid, invoice finance unlocks this money early. It’s like a business loan, but instead of using a physical asset like a building as security, invoice finance uses your accounts receivable.

Invoice finance is a type of asset finance that enables you to borrow money based on what your customers owe to your business (accounts receivable).

Unpaid invoices of course represent money that will be paid to you. You might offer your customers payment terms of 30, 60, 90 or even 120 days. Assuming your customers pay on time, the value of your sales is still locked in for those 30, 60, 90 or 120 days.

With invoice finance in place, rather than waiting for your invoices to be paid, a lender will advance you most of the value immediately – so you get paid faster for completed work. A lender typically advances you up to 95% of the value of your invoices, with most of the other 5% paid to you later.

There are three main different types of invoice finance:

• invoice discounting, including selective invoice discounting
• invoice factoring, including spot factoring 

Confidential invoice discounting is, as the name suggests, usually confidential (though your lender might insist on disclosed invoice discounting). You collect payments from your customers as normal and they pay into a trust account in your name – they won’t know you are using invoice finance.

Invoice factoring, by contrast, is usually disclosed. Your customers pay the factoring provider directly when the invoice is due. Since your factoring provider deals with your customers, they will be made aware of the financing facility.

Invoice discounting and invoice factoring are generally more widely available to established businesses rather than startups – you need to have a reliable turnover. 

Because invoice discounting is a riskier prospect for your finance provider (compared to factoring), you might find it hard to obtain if you are an early-stage business. To qualify for invoice discounting you need to reassure your finance provider that they’ll be repaid by your customers after advancing money to you. So you will need:

• an established method of credit collection
• a track record that proves that your clients pay on time.