What is Invoice finance?

If you regularly invoice businesses, you could be eligible for invoice finance — one of the best ways to ease cash flow problems and get paid faster for completed work.

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Definition

Invoice finance is a way of borrowing money based on what your customers owe to your business. Unpaid invoices represent money that will be paid to you, but you have to wait for the payment terms to elapse, which could be anything from 14 days to 90 days or more. Invoice finance gets you most of the cash immediately, so you don't have to wait to get paid.

The concept is simple — rather than waiting days or weeks for your invoices to be paid by customers, lenders advance you most of the value immediately. That means you get paid faster for completed work, so you can focus on running your business.

Invoice finance example

Sarah’s Interiors Ltd has a big new project coming up. Sarah knows she’ll need to pay for extra materials and take on another member of staff to do this new job, and she’ll only get paid when it’s finished.

Sarah is owed £5,000 by her previous client for a completed project, but the invoice has payment terms of 30 days. Sarah agrees an invoice finance deal that will give her 85% of the invoice up-front, with total fees and charges at 3%.

Breakdown:

Invoice value = £5,000
Advance amount (85%) = £4,250
Fees (3%) = £150

When Sarah shows the invoice to the lender, she receives an advance of £4,250 within a couple of days. Then, when the customer pays the invoice, the full £5,000 goes into a bank account controlled by the lender.

Sarah gets the remaining value of the invoice (£750) minus fees (£150), so she receives £600.

All invoice finance operates under this principle, but there’s a variety of different products available.

Types of invoice finance:

Invoice discounting
Invoice factoring
Selective invoice finance (or ‘single invoice finance’)

You can find out more about each specific product by following the links — on this page we’ll look at some general things to consider about invoice finance.

Which type of invoice finance is right for my business?

One of the key things to consider with invoice finance is: how much control do you want? Once you know the answer to that question, you can get more specific about the terms and conditions you’d prefer. Let’s take a closer look at the key product categories within invoice finance:

Invoice Factoring

Invoice Factoring is the product where the lender is most closely involved. They will provide ‘credit control’ services to ensure your customers pay on time, which might be exactly what you need — to focus more on your business, instead of chasing late-paying customers.

Credit control services: the lender handles collecting payment from your customers
Your customers will know you’re using a factoring provider
Factoring providers can credit check potential customers for you
Easier to secure for small or early-stage companies

Invoice Discounting

Invoice Discounting is the most straightforward form of invoice finance. It’s more hands-on for the business using the facility, and is generally only available to more established businesses with higher turnover.

Unlike factoring, if you choose discounting you’ll still have to do your own credit control to ensure customers pay on time.

Selective invoice finance and spot factoring

These products differ from factoring and discounting because they aren't full-facility products. In other words, you can choose which invoices you'd like to finance, and deal with the rest as normal.

Selective invoice finance allows you to choose specific customer accounts to finance, while spot factoring allows you to choose specific invoices. Either way, you can take a more flexible ad-hoc approach, and get funding when you need it.

It’s a good fit for businesses with a clear idea of how much money they need, but can be more difficult to secure than factoring or discounting. Whatever facility you choose, invoice finance can be a great way to improve your cashflow situation.