Updated: Nov 19, 2021
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What is invoice finance?
Invoice finance allows your business a way to immediately get paid the cash that your customers owe you. The funds are given to you by an invoice finance lender, and you can generally access them within 24 hours of submitting your customer invoice. This type of financing helps to fix your cash flow gap that arises from the period where you’ve spent money on your supplier invoices, but you’re waiting for your customers to pay. Sometimes these cash flow gaps can force businesses into insolvency or debt due to late customer payments. With an invoice finance facility set up, a lender will pay you an advance which could be anything between 80% - 95% of your customer invoice and is usually for a period between 14 - 90 days.
Different types of invoice finance include:
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.
The customer doesn’t know that a 3rd party is providing finance to your business. Credit control is kept in a house with the business, requiring monthly reconciliation. The lender's management fees are generally lower than with invoice factoring but require proof that the business has a suitable credit control system in place.
Who is it suitable for?
Whilst supplier-side trade finance is typically most suitable for those buying physical stock, 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?
Diane owns a hospital supplies wholesale business, and she sends an invoice of £5,000 to her customer for the 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.
Diane is paid £4,250 in advance by the lender and pays £150 in interest to the lender
Once Diane 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 its 3 percent fee.
What are the benefits of invoice finance?
A viable alternative to expensive bank loans and overdraft facilities
Bridges the gap between the 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
How can I access invoice finance?
Get in touch with us at Funding Routes and one of our team will be happy to show you a market view of what’s available in terms of invoice finance based on your business requirements. There’s no cost associated with looking, and going through us wouldn’t affect the price you're offered by an invoice finance provider.