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What is Invoice Finance?

Invoice Finance is a way for a business to borrow money against its outstanding invoices. When you issue an invoice you may have to wait anything up to 120 days (depending on your terms) until your client pays. Invoice Financing enables you to get access to the those funds within days so you no longer have to wait until your client pays you. A lender will typically give anything between 60% – 85% of the invoice on Day 1, this varies depending on the debtor book, sector and type of business, sometimes higher amounts can be given by using additional schemes available to UK Businesses.

What are the different invoice finance products?

There are broadly three different types of invoice finance available to businesses

  1. Invoice Discounting – this is probably the most straightforward type of invoice financing. The business is still hands on with its invoices and will run it own credit control.
  2. Invoice Factoring – With this product the lender is more closely involved in the transaction. The lender will generally handle the collection of invoices from your clients and act as your credit controller. They will then collect the debt and make the remaining funds available to the business.
  3. Selective/Spot Invoice financing – This product enables you to select the invoices that you want financing rather than the ones above that look at all of your invoices.

Conditional/Disclosed facilities  – If a facility is confidential then everything the client will receive will look like its coming from the business that it owes the invoices to, with a disclosed facility the client will receive communication and branding from the lender who holds the invoice finance facility.

What sectors can use Invoice Finance?

Invoice Financing is available to a number of sectors with some lenders specialising in certain sectors.

Exports Wholesale
Haulage & Logistics Construction
Recruitment Manufacturing
Textiles & Fashion Professional Services

What are the advantages?

With the advances in technology and the rise in cloud based accountancy software this is dramatically increasing the speed at which businesses can access their funds. Depending on the lender this could be anything up to 48 hours of invoices being issued (if not quicker), so its number one advantage is that is speeds access to funds so your not having to wait until the end of of your terms of business to receive the funds.

Another advantage is that you are using assets within the business to help raise finance rather than taking on additional debt such as a business loan. Whilst a business loan may also be able to support a business there are a number of lending products available to business owners each with there own advantages and disadvantages.

Invoice finance can be used for startup businesses so if you only have a relatively short trading history you may be able to start to receive an advance on your invoices. The lender will generally look for a history on how you have been collecting invoices and want to see a few examples of invoices raised, terms being issued and the collection of those invoices.

How much does Invoice Financing cost?

With so many lenders now offering invoice finance to their clients the cost varies from lender to lender. The key things to look at are

  • The advance amount – how much will lender advance you on day 1?
  • Service Fee – This will cover aspects such as management of invoices, collections, administration and is typically charged at a percentage of the companies turnover
  • Discount fee – This is the cost of borrowing the money – so when you draw down the funds you will be charged a percentage fee, the longer the invoice is outstanding the more the fee will be as it acts similar to the interest rate on an overdraft or loan – but not has high!

Bad Debt Protection

So what happens if your invoices can not be collected or the businesses within your supply chain cease trading? This is where Bad Debt Protection can come in. This is a type of insurance that will cover you should businesses within your supply chain cease trading, often if they enter liquidation or if your debtors default on the invoice. The insurance will provide cover against the outstanding invoices so that your business still receives some of the invoice due.

Find out more about invoice financing or bad debt protection and how it support your business by booking your free consultation