Invoice finance

Quick facts

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.
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.
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.
There are three main different types of invoice finance:

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

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

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. 

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. 
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.

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