How can invoice financing benefit small businesses?

Find The Right Business Funding

    • checkBorrow betweeen £1,000 and £5m, rates from 2.5% APR
    • checkFunds received in as little as 24 hours
    • check100% free, no obligation service

Written by Michael Foote, founder of Quote Goat, has over 13 years experience working in the finance, insurance and currency sectors.

Unpaid invoices can be a real hassle for UK businesses. It isn’t uncommon for outstanding balances due to unpaid invoices to leave smaller companies in real trouble; whether it means putting them in a position where they are unable to pay employees’ salaries, pay their own invoices and bills or in some severe cases, forcing them into legal battles to reclaim unpaid invoices that they cannot afford and which can put them out of business altogether.

In the time it takes businesses to reclaim money from unpaid or late invoices, they could have reinvested into their own operation and worked on growing their business. One way for businesses to help move things forward is to invest in invoice financing. But what is it?

Invoice financing typically falls into two categories: invoice factoring and invoice discounting.

Invoice Factoring

Invoice factoring allows businesses to borrow money using the value of any unpaid invoices as collateral. The lender will typically provide between 85-95% of the invoice amount upfront, taking on the invoice from the client themselves. The financier will reclaim 100% of the outstanding invoice from the client owing.

This method of lending helps free up immediate cash flow. It also takes away the responsibility of chasing up outstanding invoices as the financier is essentially buying the debt from you, taking on your sales ledger and becoming personally responsible for reclaiming the outstanding balance.

This is especially helpful for businesses that lack the resources to pursuit late or outstanding payments themselves. Once invoice financing has been agreed, the lender will receive their payments by collecting from your clients who have yet to pay their invoices. This unfortunately does mean that your clients will be made aware that you are lending money by using their invoices as collateral.

Invoice Discounting

To work with a lender using invoice discounting an upfront fee is usually required, this is often paid on a monthly basis either on a 12 month or rolling contract. Once this is completed, the invoice financier will lend a percentage amount of what is outstanding against unpaid invoices; an amount agreed upon between the lender and the debtor.

Invoice discounting, compared to factoring, provides a more discreet route for businesses who want their lending habits to remain confidential; for this, the lender won’t take over the company’s sales ledger and the outstanding debts will still have to be reclaimed by you.

For more information on invoice finance, visit our page now.

Business Finance Guides