INVOICE FINANCE

Invoice Finance

 

Invoice Finance works by funding your business against unpaid invoices owed to you for goods and services already delivered. The lender is in effect buying your invoices from you, and advancing funds as soon as required, whilst they wait for repayment. A percentage of the invoices is withheld to cover the financing costs. It is available to businesses that sell business to business (B2B) only. 

The amount of funding you can get depends on the individual lender, but can be up to 95% of the value of the invoice. Once your customer pays the invoice, the remaining funds, less any fees, are sent through to you. 

Communication with your customer around credit control varies according to the type of invoice finance facility you have; there are three main types of Invoice Finance: 

 

Factoring 

This lets a business borrow money against all unpaid invoices, the provider manages the credit control and collections on your behalf – your customers pay the provider rather than your bank account. This gives you access to cash at point of invoice rather than waiting for your customer to make payment to the invoice terms, or later if they are a poor payer. 

 

Discounting 

Similar to Factoring but with Discounting you retain control of your credit control and customer communications.  The invoice discounting is generally confidential. 

 

Selective 

Allows you to sell specific invoice(s) at a discount to a lender rather than your entire accounts receivable. 

How does it work?

  1. You issue an invoice to your customer in the normal way and send details of this invoice to the finance provider.

  2. Funds are made available against this invoice, up to 95% of the value, allowing you to draw funds into your bank account.

  3. Once your customer has paid the invoice, the final instalment is paid to you less any charges. 

 

This type of finance is an unsecured form of borrowing although you may have to give a charge over your company's debtor book, since it is this that is funding the finance. 

Advantages of Invoice Finance

  • As Invoice Finance is secured against your accounts receivable or invoices you do not need to put up any personal or company assets as collateral. A personal guarantee may be required. 

  • With a full factoring service, you get credit control completed for you, reducing your time spent on administration.  

  • This form of finance can be scaled – as your business grows, the access to funds also grows  

  • Once the facility is set-up, it is easy to draw funds from unpaid invoices. 

 

Disadvantages of Invoice Finance

  • Only commercial invoices can be used.

  • You need customers to pay otherwise funding will be restricted.

  • Limited funding likely on higher risk customers where potentially you need the funding most. 

  • Depending on the agreement you sign, the lender may hold you accountable if your client does not pay the invoice. 

  • It can be considered an expensive form of finance, particularly when you have regular good payers.

  • Through factoring, you may feel you lose some control and your customers may prefer to deal with you directly.

  • Lenders will want to make sure that there is a low risk for them so may not want to lend against invoices where the client has previously sent late payments, which may be the invoices you need funding the most. 

  • If you wish to use Discounting, you will need a strong credit collection process in place.

Frequently asked questions

How much can I borrow? 

The amount you can borrow will depend on the amount you invoice. Lenders will have limits against your customers – ultimately they are funding against the quality of your debtor book – so if your customers have a poor credit rating, they may restrict funding. They will generally lend up to 95% of the value of your invoices. 

What will I need to apply? 

This will vary between lenders, but generally you will need; 

  • To invoice business customers for a product or service provided 

  • 12 months of banks statements 

  • Some financial accounts, such as a balance sheet 

  • Aged debtor book 

  • List of customers 

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