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What Is Invoice Finance?
Invoice finance refers to a business taking a loan against its unpaid invoices. The lending party (aka financing company) releases up to 95% of the total value of the invoices upfront. The remaining amount is collected from the customers. In this way, instead of waiting weeks or months for payment, a business gets instant cash flow for a small fee.
What Is A Financing Company?
A financing company lends your business with immediate cash against your unpaid invoices for a fee. It releases up to 90% of the invoice amount in as little as 24 hours. The remaining amount is released (after fee deduction) when the invoices have been paid in full. The responsibility to collect payments lies with you.
How Does Invoice Finance Work?
Invoice finance works in 4 simple steps:
Sell goods & services: You sell your goods and services to customers and generate invoices as usual.
Invoice finance agreement: You enter into an agreement with the financing company that verifies your unpaid invoices.
You get the money: The financing company releases up to 95% of the invoice value upfront. The rest is paid (after fee deduction) once the invoices are cleared.
Collection responsibility: In invoice finance, the business collects invoice payments from the customers and bears responsibility in case of non-payment.
Other types of factoring:
This term is used interchangeably with account receivables factoring. It involves the business selling its unpaid invoices to a third party (factoring company) at a discounted rate to receive early payments. Upon receiving the invoices, the factoring company releases the bulk of payments (up to 90% of the collective invoice value). The rest is paid (after fee deduction) when the payment is collected in full from the end customers.
Spot factoring (also called single invoice factoring) enables a business to sell individual invoices selectively. This type of factoring gives businesses the flexibility to choose which invoices to factor based on their cash flow needs.
Reverse factoring, also known as supply chain financing, is a three-way agreement between a supplier, a buyer, and the factoring company. The factoring company pays the supplier on behalf of the buyer, offering quick payments at a discounted rate.
In recourse factoring, the business that sells its invoices to the factoring company remains liable if the customer fails to pay the invoice. If the customer defaults, the business must buy back the invoice or replace it with another. The risk of non-payment remains with the business.
With non-recourse factoring, the factor assumes the risk of non-payment by the customer. If the customer fails to pay due to insolvency or credit issues, the factoring company absorbs the loss, and the business is not responsible for repayment.
Debt factoring, also known as receivables factoring or invoice factoring, involves a business selling its accounts receivable (unpaid invoices) to a third party. The factoring company buys these invoices at a discounted rate, providing immediate cash to the business.
Difference Between Invoice Finance & Invoice Factoring
The key difference between invoice finance and invoice factoring is this:
- In invoice financing, a business borrows money against its unpaid invoices from a third party, without selling the invoices. The responsibility to collect payments for the invoices remains with the business.
- In invoice factoring, a business sells its invoices to a third party for immediate cash flow. The factoring company takes responsibility for collecting and managing payments from customers in this case.
Invoice factoring is more expensive than invoice financing - Invoice financing is confidential. Customers may never know that a business has taken a loan against invoices.
- Invoice factoring is not confidential as the factoring company collects payments from customers directly.
Is Invoice Finance Fit For Your Business?
Need instant cash
Is your business experiencing cash flow problems due to late payments? Invoice financing is an easy and quick way to inject cash into your business.
Monthly turnover £4,000+
Invoice financing is best suited for businesses that sell on credit and have a turnover of £4,000+ per month.
Problems in payment collection
The payment collection process remains under your control in invoice finance as compared to invoice factoring, in which the third party collects and manages invoice payments. If you value your customer relationship and brand image, invoice finance is the right option for you.
Sectors that Invoice Factoring covers
Retail
Mechanics
Restaurants
Bars & Clubs
Leisure Clubs
Plus Many More
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With invoice factoring, you can
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Free up time by outsourcing collections.
Invoice Financing FAQs
Invoice finance is not regulated in the UK. There is a general understanding in the finance sector that regulation by the Financial Conduct Authority (FCA) will lead to an increase in the cost of invoice finance. Therefore, this status quo enables invoice financing services to remain competitive and budget-friendly.
Invoice finance works like a short-term business loan. The business takes a loan against its assets (i.e. invoices) which is usually up to 90% of the total invoice value. It then collects the payments from invoices and pays back the invoice finance provider the borrowed sum plus an additional fee.
Invoice finance can be a suitable option for small businesses that have a monthly turnover of over £4,000. It is one of the most reliable ways to inject quick cash into the business.
Invoice finance is preferable when you want to
- Maintain control over customer relationships as it allows you to retain control over collections
- Don’t want your customers to know you are financing your invoices as invoice financing is confidential, unlike invoice factoring.
Some invoice financing providers may work with businesses having bad credit ratings but expect terms and rates to be influenced accordingly as a bad credit history indicates higher risk.
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