Invoice finance

B2B businesses benefit most from invoice financing. Specifically, manufacturing, logistics, and services businesses can find particular benefit in it, as they may require the funds earlier to pay for materials and work. 

Our expansive network of lenders ensures that we're able to deliver the most suitable options available to eligible borrowers. We work closely with over 120 lenders across the UK, offering up to £20M in a range of business financing solutions. Our expert team of advisors can let you know if you’re eligible without impacting your credit score, and if you do go ahead with an application, we provide support throughout the process. 

When it comes to invoice discounting vs invoice factoring, while both come under the umbrella of invoice finance, they differ in some key ways. Namely, invoice discounting is much more confidential than invoice factoring. However, invoice factoring can, in some cases, enable you to sell off the responsibility of chasing payments. 

Do be aware though, that this is not always the case, and that in some instances you’ll be required contractually to buy the invoice back from the factoring company if your client doesn’t pay. In a nutshell, invoice discounting can be more expensive than factoring, and you don’t get the benefit of outsourcing the administrative burden of managing your sales ledger, but you remain in control of your client communications. 

Jerry runs a large B2B marketing agency. When Jerry’s clients request work, he needs to pay freelancers, rent a studio to shoot adverts, and pay internal employees at the end of the given month in order to deliver the work to the client. However, per his contracts and industry expectations, he also needs to provide clients with 60 day payment terms, leaving him out of pocket for two months at the end of each project. 

Enter: invoice discounting. With invoice discounting (one of the two core types of invoice finance), Jerry is able to submit the invoices as he raises them to his lender, who sends him 80% of the funds within several days of each submission. This enables him to pay his freelancers on time and maintain stable client relationships. Jerry then collects the payment as usual from his end client at the end of the two months and returns the money to the lender, along with their 2% fee. 

Invoice finance is usually less expensive than other forms of finance, like short term unsecured loans. There are several reasons for this, including the built-in security in the form of the invoice itself. In general, the cost of invoice finance comes down to interest rates, which land at around 0.5-3% of the total value of the invoices. Given interest rates on business loans have been known to go up to 20%, this can make invoice finance a fairly effective way to gain access to funds. 

Invoice finance is a fairly speedy process. In general, it can take anywhere from a few days to up to a month to gain access to invoice finance. However, if you already have an agreement in place with a lender, submitting new invoices for approval is usually a much faster process, with funds sometimes hitting your account within 48 hours. The applications themselves can take only a few moments, but this depends a lot on your circumstances as a business, the number of invoices you’re submitting, and the value of those invoices. 

Invoice finance is suitable for a wide range of business types. There are many benefits of invoice finance for small businesses, including stabilising cash flow, scaling as you grow, and reducing the impact of late payments on your business. However, many invoice finance lenders prefer to work with medium to large businesses, as their invoices are generally greater in size, so finding a lender who may cater to you could be a challenge. 

Selective invoice finance is where you choose the specific clients to use for invoice finance, as opposed to selling or borrowing against your entire ledger. Spot factoring is similar but you can choose the specific invoices, not just the specific clients. These terms are sometimes used interchangeably, so ensure you understand exactly what the lender is offering before agreeing to anything. 

Invoice financing is suitable for businesses that sell to other businesses, rather than directly to consumers, as you’ll need to be raising invoices to use this form of financing. Many lenders require a minimum turnover for applying businesses. Feel free to get in touch with our team to find out if you qualify. 

You will need to pay an interest rate, which is a percentage of the total value of the invoice(s). This is usually gained by the lender once they secure the funds from your client. You may also have to pay an application fee, setup fee, annual renewal fee, or late payment fee. 

That depends a lot on the lender, your application, and the total value of the invoices, however, once your application has been approved and you’ve coordinated an agreement with your lender, you could gain access to the funds within 24 hours. 

Maybe, it depends which type of invoice finance solution you choose to leverage. If you select invoice factoring, then yes, your clients will know that you are using invoice finance. In fact, the lender usually collects the payments directly from the client, so they will likely have to change the account they pay into. 

However, if you use invoice discounting, it’s possible you may not need to inform your clients. This is because invoice discounting is an agreement between you and the lender in which you retain control over your ledger, payment collection, and invoicing. In this instance, you collect the payment from the customer and then forward the lender their portion. Consider how much privacy you’d like to retain over your funding agreements when deciding which type of invoice finance you’d like to apply for. 

How invoice finance affects your balance sheet varies depending on the type of financing you seek. 

Invoice discounting: Invoice discounting is treated as a loan, and as such increases your liabilities. This increases both your assets and liabilities, since the funds you receive count as assets but the loan counts as a liability. 

Invoice factoring: Invoice factoring involves selling your invoices, which takes them off your accounts receivable as an asset. However, the cash you receive in turn is then added to your total assets, with the fee as a reduction. 

Yes, but they may find it harder to find lenders willing to cater to them. This is because the administrative work involved in setting up invoice financing can be similar for the lender regardless of the invoice size, which can make smaller invoices less appealing. 

That doesn’t mean smaller businesses or startups shouldn’t try to find lenders that do offer invoice financing. Invoice financing is particularly suitable to startups and small businesses, who may be in the early stages of growth and need that additional cash flow support to create stability as they expand. The fast access to cash, scalability, and built-in security of the loan type can make invoice financing attractive to anyone navigating the early stages of company growth. 

As with all funding solutions, invoice financing comes with its risks and drawbacks, including: 

Debt cycle 

Once an invoice financing facility has been set up, it can be tempting to reuse it over and over with all future invoices, eating into your profits on a monthly basis. 

Payment risks 

Depending on the agreement you have with your lender, it’s possible the client not paying could present a severe business risk. You could be charged late payment fees or the lender could decide you’ve missed a payment, which could have an impact on your business or personal credit score. 

Loss of control over customer relationships 

With a tool like invoice factoring, you’re essentially selling off your invoices, which could negatively impact your relationships with your customers, as they may not appreciate having a third party involved in the payment process, particularly if the involvement comes as a surprise. 

How invoice finance impacts customer relationships depends heavily on the type of invoice finance you select. If you choose invoice discounting, it’s possible that the financing solution may not impact your relationship at all and that the entire process could be kept confidential. 

However, if you decide to apply for invoice factoring, the factoring company will likely take control over the payment collection process. This means they could run a credit check on your clients, which could add a hard search to their report. They could also employ strategies for retrieving the funds once the invoice date has passed that you may not be comfortable with. 

The inclusion of a factoring company, in and of itself, adds distance between you and your clients, since you’re adding a third party into the relationship that wouldn’t have been there before.

However, there are also possible benefits. For one, stable cash flow could reduce some of your anxieties, making you an easier partner to collaborate with. Similarly, it could also give you more time and ability to focus on growing the business, enabling you to deliver better services to your clients. 

Sometimes, it depends on the agreement you have with your lender or factoring company. In some instances, invoice finance can be considered a loan, while on other occasions it’s considered the sale of an asset. Please note that invoice finance is only as good as the strength of your debtors, customers will have to change the account they pay into, and it can be admin heavy.

Finding a provider you trust is pivotal. After all, you could be trusting them with your relationships as far as payment collections go. 

First, get a wide range of options. A broker like Funding Options by Tide could help here, but if you choose to go it alone, consider an internet search. Just be sure you’re gathering quotes, rather than directly applying, as multiple hard credit checks could impact your creditworthiness, which lenders will use to determine whether or not they extend funding to you, and at what interest rate. 

Secondly, check online reviews or ask anyone you may know who has borrowed from the lenders for details of their experience. Lastly, gather together some questions you have and ensure the lender’s answers (whether provided over the phone or via their website) satisfy you. Suitable questions could include:

• Will you be contacting my clients? 

• What fees do you charge

• What happens if my client pays late? 

Along with invoice finance, some other alternative business financing options include a merchant cash advance, asset finance, bridging loans, and revolving credit facilities.