1) Invoice finance in a nutshell
Invoice finance is a collective term for the various types of invoice based lending such as invoice discounting, selective invoice discounting, invoice factoring and spot factoring.
This type of finance uses invoices as a way for businesses to unlock cash tied up invoices and therefore speeding up cash flow. This is done by selling their invoices to a third party who will advance some of the funds the invoice is worth up front, for a cut of the invoice.
1) Also known as…
Receivables finance; Accounts receivables finance; Invoice factoring; Invoice discounting
3) How invoice finance works
- You provide the goods/services to your customer and invoice them
- You send the invoice details to the invoice finance provider
- A percentage of the face value of the invoice is paid to you, usually within 48 hours (different factoring companies will advance different percentages % depending on their own risk criteria)
- Depending on the type of invoice finance, either you carry out payment chasing as normal or the invoice finance provider will take control of this part of your client relationship for you
- When your debtor pays, the remainder of the invoice that you didn’t receive earlier is paid back to you – less a service fee
4) Advantages of invoice finance
The obvious advantage of invoice finance is being paid the majority of an invoice within 48 hours, instead of waiting 30+ days, thus helping businesses manage their cash flow.
Another significant advantage is that invoice finance gives businesses a way to fund their growth without taking on extra liabilities or debt, as with a business loan, and using assets they already have. See our page on invoice finance vs business loans here.
5) Things to consider
It’s important to look into the different types of invoice finance what suits your business. For example, you may have to put your whole ledger through the invoice finance provider but want to only finance a few invoices or customers. Or you may want to do whole ledger and access more money.
Another consideration is credit control. Some invoice finance providers will insist on managing credit control themselves which could damage your customer relationships.
As mentioned, these things are specific to the types of invoice finance so make sure you know which one it is that you want and what each offer.