Invoice financing is any form of financing that provides your business with a short-term loan that is secured by providing the lender the right to collect your revenue from a customer you have invoiced.

There are many different forms of invoice financing available anything from a full service ledger management provided by factoring to a basic loan provided by invoice discounting

There are over sixty different lenders that will provide invoice financing in the UK. Anyone from high street banks to specialist lenders. It is important that you find the company that provides the form of lending and the level of service that you require.

What are the different forms of Invoice Financing?

Recourse Factoring: In this form of invoice finance the lender handles the administration of your sales ledger and the collection of your debts. The lender will provide you with a cash facility of up to 85% of invoicing outstanding. The balance being paid to you as the debt is collected. Your business is responsible for any bad debt losses that may occur.

Non-Recourse Factoring: Is similar to recourse factoring but for an additional cost your company is protected against any bad debt losses that may occur.

Recourse Invoice Discounting: This form of invoice financing just provides you with the cash facility. You are responsible for all the administrative work of handling your sales ledger and collecting of your debts. Since you are handling all the administrative work, your clients will never realize that you are using invoice financing to improve your cash-flow. Like recourse factoring your business is responsible for any bad debt losses that may occur.

Non-Recourse Invoice Discounting: Is similar to recourse invoice discounting but for an additional cost your company is protected against any bad debt losses that may occur.

Confidential factoring: Is similar to factoring but all correspondence between the lender and your clients done on your company’s stationary. Like invoice discounting your clients will never realize that you are fusing invoice financing.

Disclosed Invoice Discounting: Is similar to invoice discounting except that the fact that you are using invoice discounting is disclosed to your clients.

Trade Finance, Stock Finance, and Import Finance: This is a form of financing that complements invoice financing. It allows your company to finance raw or finished goods that you have pre-sold. Since this form of financing allows you to finance your goods prior at the time of purchase.

Who qualifies for invoice financing?

Companies possessing the following characteristics can take advantage of invoice financing:

  1. Projected turnover of over £50,000 for the next 12 months. It doesn’t matter if your company is a start up or has existed for 10 years, if your projected turnover for the next 12 months is greater than £50,000 it qualifies.
  2. Your business normally sells its goods or services on credit terms. If you are paid cash for your goods or services you will not have invoices to finance.
  3. Your business must invoice clients after the goods are delivered or the service is performed. If you invoice your clients prior to performing the service or delivering the goods you invoices will not qualify for financing.
  4. Your clients must be other businesses.

Why should you use invoice financing?

There are several reasons that companies use invoice financing, the following are just a few:

  1. If your business needs fund to finance an increasing level of turnover
  2. If your cash flow is suffering by inefficient debt collection methods.
  3. Your business needs a cash flow or administrative solution to overcome the strains caused by fluctuating seasonal demand
  4. A business wishing to concentrate on sales and allow their sales ledger administration to be handled in a professional manner.

How does invoice financing work?

The following example is a step by step explanation on how invoice financing would work for your company.

  1. Invoice Finance Company (“IFC”) agrees to factor your company’s invoices on the following terms:
    • 6% Interest Rate per annum on funding
    • 2% Service Charge against turnover
    • 80% Advance Rate against approved invoices
  2. Your company agree provide your services to a new client (“NC”)
  3. Your company gets approval to finance NC invoices from IFC
  4. Your company completes an order for NC worth £1000 and want to invoice NC for the £1000
  5. Your company informs IFC that you want to invoice NC for £1000. They send NC an invoice for that amount.
  6. Your company account has been updated as follows:
    • Amount available for immediate advance: £800
    • Service Charge: £20
    • Amount available on collection of invoice: £180
  7. Your company takes advantage of the£800 advance immediately
  8. 30 days later NC pays their invoice and you get access to the rest of the invoice £180 less the interest of £4 (the equivalent of 6% interest on £800 per year for one month).
  9. You withdraw the £176 from the account.

How much cash will be provided by invoice financing?

Most invoice financing lenders will provide and advance up to 85% of your invoices. There are several situations where the lender may provide you with less than an 85% advance against your sales ledger:

  • At the commencement of you invoice financing agreement. The lender will not usually provide an advance against invoices that are already over 90 days old.
  • Invoices that have been disputed by the client
  • Invoices issued to clients that have not been deemed credit worth by the lender or that are greater than the agreed upon credit limit for the client.
  • Invoices that have been issued on abnormally long credit terms (i.e. over 90 days).
  • Invoices from related companies or to your company’s suppliers.