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What is invoice finance?

If your business needs cash to finance expansion plans or fast working capital to pay bills, wages and other costs, invoice finance is an option. Invoice finance allows you to be paid almost instantly for the value of your outstanding debts.

by Credit Passport
5 MINS READ

What is invoice finance?

Invoice finance is one of the sources of finance for small businesses. A type of short-term borrowing, it’s similar to a business loan. But instead of security for the loan being something physical like equipment or a building, invoice finance uses accounts receivable.

The amount you can borrow is based on what you expect to receive from outstanding invoices or contractual billing. Rather than waiting 30 days, 90 days or even longer for money to come in from invoices, a lender will pay you almost instantly for those invoices in exchange for a fee.

Unlike a regular loan, there’s no fixed repayment period for this form of small business finance.

What is invoice finance used for?

Invoice finance helps a business with fast working capital loans, providing cashflow to pay bills, wages and other costs. It can also be used to finance expansion plans and make acquisitions.

Plenty of high-growth SMEs need short-term finance to support their growth plans. They turn to invoice finance in the absence of other ways of obtaining working capital. For some, it could even be a way to avoid business failure due to cash flow

What types of company is it suitable for?

Invoice finance is available to a wide variety of companies, from freelancers and gig workers up to larger SMEs with a turnover of £250,000 or more.

It’s ideally suited to businesses that sell products or services on credit and send invoices to customers for payment, including B2B service providers, transport companies, manufacturers, employment agencies and wholesalers.

Different lenders tend to concentrate on different sizes of business, offering invoice finance options that are suitable to your working capital loan requirements.

With invoice discounting, your business is responsible for chasing payments. That makes it better suited to larger businesses with an existing credit control function that routinely contacts customers.

What are the advantages?

  • Invoice finance typically releases more funding than a bank overdraft or loan.
  • The amount you can borrow will also grow with your invoices, so as your sales grow, so does the amount of capital you can access.
  • The amount you can borrow is typically recalculated after every transaction. This saves you time later on in renegotiating the terms of future loans.
  • There’s no need to use assets for security.
  • Some lenders off protection against invoices that are never paid (bad debts)

How does it work?

The details vary from lender to lender, but this is how invoice finance is typically provided.

Step 1: You submit an outstanding invoice to the lender.

Step 2: The lender pays you a proportion of what the invoice is worth, typically 90% or 95% of its value.

Step 3: Either you or the lender chases the customer to pay the invoice, depending on whether you are using invoice discounting or invoice factoring (see below).

Step 4: The lender pays you the remainder of the invoice minus fees. It then recalculates the funds you can borrow.

What types of invoice finance are available?

There are two main types of invoice finance: invoice discounting and factoring.

With invoice discounting, your business is responsible for chasing payments. That makes it better suited to companies that want to stay in control of chasing invoices, or larger businesses with an existing credit control function that routinely contacts customers. Since invoice discounting is a riskier prospect for a lender, it can be harder for startups to obtain than the alternative - factoring. It’s suitable for businesses with a higher turnover. They can secure funding against all of their outstanding invoices and keep the loan confidential from their customers.

Factoring

With factoring, the lender chases the outstanding debts on your behalf, providing a full credit control service to liaise with your customers. The lender controls your sales ledger and so the process is disclosed to your customers. However, it is possible to use a confidential version of factoring. With confidential factoring, the lender introduces itself to customers as part of your business - the accounts department, for example.

With factoring, the lender chases the outstanding debts on your behalf, providing a full credit control service to liaise with your customers.

Which Credit Passport partners provide invoice finance?

Penny provides invoice finance that is perfectly targeted at small businesses, freelancers and the self-employed - it's really quick to apply, and you get get finance even if your credit score is low.

 

Interested in more funding solutions:

Don't forget you can log into your Credit Passport dashboard and see all the matched offers for your business. 

Log in to Credit Passport here to see what else might be right for you, or to get your Credit Passport web badge to give your supply chain and customers confidence in your company.

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