Invoice financing is a short term funding option which allows you to unlock the value of a customer’s invoices by receiving a percentage of their value in advance of their payment date. This type of finance is generally only suitable for businesses that invoice larger companies for goods or services.

Quick-fire facts

  • A way to use your pending customer invoices to get cash before they actually pay you.
  • Receive up to 90% of their value in an upfront payment. You’ll pay a fixed fee for this service.
  • You may be responsible for repaying the full value of the invoice if your customer fails to pay.

How does invoice financing work?

Invoice financing allows you to offer your customer invoices as collateral to receive a portion of their value in advance of their payment term. This agreed percentage may be up to 90%, but this can vary depending on the profile of the customers you’re invoicing.

The remaining value of the invoice (10% – 30%) is held in reserve until the customer has made the full payment. The interest and management fee charged by your provider are deducted from this, and the rest is transferred to you. These costs can vary hugely depending on which provider you choose.

An important consideration for any business is whether they are liable for the losses if a customer doesn’t (or can’t) pay an invoice that has been used for finance. Invoice finance can be conducted in one of two ways: recourse and non-recourse. Invoice financing on a non-recourse basis is often more expensive and much more difficult to get approved for than on a recourse basis.

Invoice factoring vs invoice discounting

Invoice financing actually refers to two related, but slightly different financial services; invoice discounting and invoice factoring. Both allow you to use your invoices as collateral to secure a credit line, but their differences are important.

Invoice factoring

Invoice factoring, also known as debt factoring, is a contract involving an invoice finance provider managing your sales ledger and collecting money owed by your customers themselves. This means your customer will be fully aware you’re using invoice finance. Using invoice factoring can free you from time-consuming invoice collection and allow you to concentrate on your business.

Most invoice finance providers want you to have a sales volume of more than £250K per year before they’ll consider factoring your invoices. Alternative providers, like MarketInvoice will advance individual invoices on much smaller sales volumes and on a pay-as-you-go basis.

Invoice discounting

Invoice discounting is different from factoring in that your customer’s payments are directed to a trust account in your name, held by your invoice finance provider. This means your provider won’t take responsibility for collecting payment for the invoice, so your customer won’t know that you’re using invoice finance.

Invoice discounting is usually only available to companies which turn over more than £1 million per year. Invoice discounting permits you to maintain close ties to your customers and continue to manage your sales ledger yourself. You might prefer this if you’re worried about how your finance provider might manage the collection of your invoices.

How much does invoice financing cost?

There are two main costs to consider before using invoice financing. The first is the amount of interest you’ll pay for advancing your invoices – this is typically similar with both invoice factoring and invoice discounting, between 1.5 and 3% per year above the Bank of England base rate.

The second is the management fee you’ll pay on the total value of the invoices you advance. This is generally around 0.2% – 0.5% with discounting, and 0.75% – 2.5% with factoring. This means invoice factoring is much more expensive than discounting. This is because the factoring provider has taken over responsibility for chasing your invoices for repayment, and takes on the extra cost of this service. You should also be wary of any additional fees the invoice finance provider might charge (see their FAQs for details).

Example case

A graphic design company has completed a lot of work, but are waiting on unpaid invoices from their customers. They take 10 outstanding invoices totalling £50,000 to the bank and ‘factor’ them for 85% of their value. They receive the £42,500 advance from the invoice finance provider, who then chases the customer for the value of the invoice. Once the customer has paid, they receive the remaining value of the invoice minus interest and a management fee.

Frequently asked questions

Besides interest and management fees, are there other costs to consider?

There are a range of fees that you might be charged when using invoice financing. Here’s a run-down of the fees you should consider:

  • Set up fees: a fee that is typically charged for setting up the facility.
  • Survey fees: some lenders may want to survey your business as part of their due diligence. Some lenders offer this free of charge while others charge a fee for it.
  • Audit fees: lenders could require an audit of your business. It is important you understand the charges and what frequency they will take place.
  • Re-factoring fees: some lenders will charge a fee on invoices that are outstanding after a certain number of days.

Will I have to sign a personal guarantee?

When you factor or discount your invoices, you’re using their value as collateral for the advance payment. This means you usually wont have to sign a personal guarantee.

Alternatives to invoice financing

If you’re looking to unlock the value of your customer invoices, it’s worth considering which other finance options might suit your business better. For instance, if you only invoice smaller companies it can be very difficult to find a provider who will finance these transactions. Many alternative finance providers will take into account your invoices when approving you for a line of credit. We think you should check out these options before applying:

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