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Invoice finance

Quick facts

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:

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, the will be made aware of the financing facility.

Invoice discounting and invoice factoring are generally more widely available to established businesses rather than start-ups – 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.

What is invoice finance?

Invoice finance allows your company to borrow money against outstanding invoices. It works like a traditional loan, but you use your accounts receivable as collateral rather than physical assets such as your premises. 

Invoice finance lets you borrow up to 95% of the value of your unpaid invoices, to a maximum of £5 million. The lender charges you a percentage of the amount of the invoice, based on the kind of product or service you sell and the payment terms you agree with your customers, plus a set-up fee. This type of finance is typically suitable for a company with a minimum turnover of £30,000.

Why would I need invoice finance?

When you issue an invoice, depending on your terms (or the terms imposed by your customer), you may have to wait for as long as 120 days for the payment to arrive in your bank account. Even though you have fulfilled your side of the transaction, you can’t access the value, which can seriously hinder your cash flow.
Invoice finance helps your company avoid this problem by unlocking that value, sometimes within 24 hours. A lender advances you the money so you can put it straight to work in your business or use it to pay bills or salaries.

What are the different types of invoice finance?

Invoice discounting 
Invoice discounting is the simplest type of invoice finance. It involves a lender advancing you money against unpaid invoices and charging a fee based on the value. This form of finance is suitable for bigger companies with a relatively high turnover as it allows them to secure funding against their entire sales ledger. 
Invoice discounting is confidential, so your customers don’t know you’re using their invoice as collateral. Your company remains in charge of its own credit collection. It’s also considered riskier so your lender may require evidence that your customers pay promptly and you have in-house capacity to chase outstanding payments. 

Invoice factoring 
Invoice factoring also lets bigger companies borrow money against their sales ledger, but it’s different to invoice discounting because the process is disclosed. The lender takes control of your credit collection and deals directly with your customers. They pay the lender, who then forwards you the balance less their fee. 
Invoice finance can benefit smaller businesses as it means they don’t have to chase their outstanding payments, although they have to prove to the lender they generate a reliable turnover. However, it may not be cost-effective for SMEs with fluctuating cash flows.  

Selective invoice financing 
Selective invoice financing lets your company borrow against specific invoices, rather than your entire sales ledger. This form of invoice finance is suitable if your company generates a significant proportion of its income from large, steady customers, and you only want to finance those invoices. Selective invoice financing can also help SMEs raise working capital if they have fluctuating cash flows, as borrowing against their sales ledger may not be cost-effective. 
Selective invoice financing comes in two forms: selective invoice discounting and spot factoring. 

Selective invoice discounting 
Selective invoice discounting works in the same way as invoice discounting, where a lender advances you money against outstanding invoices. The main difference is you choose the invoices you’d like to finance rather than your company’s whole sales ledger. As such, it’s useful for companies seeking to borrow against invoices issued to a few big customers instead of a lot of smaller customers.  
Selective invoice discounting is also similar to regular invoice discounting because it’s confidential, so it could be the right option if your company would prefer to hide from your customers that you’re securing finance against their invoices. 

Spot factoring
Spot factoring allows you to borrow money against specific unpaid invoices rather than your sales ledger, so it’s also suitable for companies with at least a few large customers. The main difference with selective invoice discounting is that spot factoring is disclosed. You hand over control of the invoices you choose to finance to the lender who collects payment from your customer and forwards your company the balance less its fee. Spot factoring may suit SMEs that don’t have the resources to chase outstanding payments and are happy to let a lender take the responsibility on their behalf. 

Confidential invoice finance 
Confidential invoice finance is a suitable funding option if you prefer your customers to remain unaware that you’re securing finance against their invoices. 
Confidential invoice finance refers to forms of invoice finance that aren’t disclosed to your customers. We’ve already described invoice discounting, but confidential invoice factoring and CHOCs (Customer Handles Own Collections) are other examples of this type of finance. 

Confidential invoice factoring 
Confidential invoice factoring works like regular invoice factoring, where a lender advances your company money against unpaid invoices while taking over responsibility for credit collection and dealing with your customers. However, the key difference is it offers the same level of confidentiality as invoice discounting. 
Confidential invoice factoring doesn’t disclose you’re using invoice financing because the lender acts as your accounts department. That means the lender uses your company name and branding when it contacts your customers about outstanding payments. They also use a dedicated line which shows up as your company’s phone number when calling your customers. 

CHOCs (Customer Handles Own Collections)
CHOCs, short for Customer Handles Own Collections, is a cross between invoice discounting and invoice factoring. As with invoice discounting, you deal directly with your own customers. However, like invoice factoring, your customers pay the lender instead of your company, so they know you’re using their invoices to secure working capital. 

CHOCs are suitable if you’d like to maintain a direct relationship with your client or for early-stage companies that don’t qualify for invoice discounting, as long as they can prove they have the in-house capacity to chase outstanding payments. They can also offer a more cost-effective option for companies with lots of small customers. 

How can I apply for invoice finance?

To get started with your invoice finance application for free, click here.

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