Invoice finance explained

• Invoice finance provides quicker access to cash as it will be available from the lender as soon as the invoice is raised. This cash can be used to grow your organisation, invest in stock, or cover operational costs.
• Invoice finance provides a quicker turnaround than other forms of finance such as loans. 
• Invoice discounting can help convert credit sales into cash enabling quicker growth and development in a shorter amount of time.
• Invoice finance can provide greater financial flexibility as the amount of funding you receive is directly linked to the value of unpaid invoices, meaning that as sales grow, so does the amount of funding you can access.

Considerations

• Invoice financing is only available on commercial invoices meaning your customers have to be other businesses, not the general public.
• If you choose to apply for invoice factoring, then chasing payments will be out of control to an extent.
• Whilst invoice financing can be a great short-term solution for cash flow, there may be processing fees and interest to pay which can add up over time.

Organisation X sells £10,000 worth of goods and issues an invoice with 30-day payment terms. When working with an invoice finance provider, the organisation can receive an immediate advance of up to 85% of the invoice value, which in this case would be £8,500.

This money can be used to invest in new equipment, hire staff, or pursue new business opportunities.

When the customer pays the invoice after 30 days, the invoice finance provider will release the remaining 15% (£1,500 in this case) to Organisation X, minus a services charge and/or other related fees.

The fees charged by the invoice finance provider are dependent on factors such as the creditworthiness of the business and its customers, the volume of invoices being financed, and the specific terms of the invoice finance agreement.

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Invoice factoring

The lender takes over the management of the your sales ledger and collects payments directly from customers. You receive an advance on the value of their unpaid invoices, typically around 80-90%, and the factoring company takes a percentage as a fee.

Invoice discounting

You retain control of your sales ledger and collects payments from customers themselves, but the lender provides funding based on the value of the outstanding invoices. You typically receive an advance of around 80-95% of the invoice value, and the discounting company takes a percentage as a fee.

Invoice factoring may be more suitable for organisations with less established credit profiles such as new start businesses, as the lender takes on the credit risk, whereas invoice discounting may be more suitable for larger, more established organisations with in-house credit control teams.