Invoice Finance

What is invoice finance?

Invoice finance is a way of getting paid the cash that your customers owe you before they pay. It helps to fix the cash flow gap that arises from waiting for your customers to pay, which can sometimes even place businesses inadvertently in insolvency or debt due to late payments. A lender will pay you an advance which could be anything between 80 - 95 percent of your customer invoice and usually for a period between 14 - 90 days.

Different types of invoice finance include:

Invoice Factoring

A business assigns their invoices to a 3rd party (the lender) who has full disclosure of their sales ledger. The lender then chases debts on the business’ behalf.

Invoice Discounting

The customer doesn’t know that a 3rd party is providing finance. Credit control is kept in house to the business, requiring monthly reconciliation.  The lender's management fees are generally lower than with invoice factoring.

Who is it suitable for?

Whilst Supplier Side Trade Finance is typically most suitable for those buying physical goods,  invoice finance can cover a much broader spectrum of industries. Whilst still catering well for wholesalers, manufacturers and distributors, invoice finance is very diverse and can work for many sectors. The large majority of companies who invoice their customers will be able to successfully take advantage of it, including businesses within the services sector.

How does it work?

Janet owns a hospital supplies wholesale business, and she sends an invoice of £5,000 to her customer for a delivery of supplies, with payment terms of 30 days. However, during this 30 days period she has more orders to place with her own supplier, along with other bills such as paying her staff. 

She finds an invoice finance lender who gives her an advance payment of 85% of the value of her customer invoice. The lender charges interest of 3% of the invoice value.

Janet is paid £4,250 in advance by the lender and pays £150 in interest to the lender

Once Janet receives her customer’s payment after 30 days, she keeps the £750 for herself and settles the bill with the lender by paying them £4,250 + £150 (the advance + the interest). In total she receives 97 percent of the invoice value, and the invoice company receives their 3 percent fee.

What are the benefits of invoice finance?

  • A viable alternative to expensive bank loans and overdraft facilities

  • Bridges the gap between sale of goods and receipt of payments, allowing you to manage your cash flow more effectively and reinvest in your company with your available funds

  • Flexible and adaptable to your business. The more invoices you issue, the more you can borrow

  • More businesses qualify for invoice finance in comparison to trade finance