What is Invoice Financing?
It is a form of short term borrowing for your business, using the value of your unpaid invoices as security for the lender. Invoice Financing provides you with to up to 95% of the value of your unpaid invoices, helping to ease cash-flow burdens.
There are two main types of invoice finance to choose from namely invoice factoring and invoice discounting. The key difference is whether your business manages the collection of outstanding payments from your customers (invoice discounting) or whether the invoice financier takes care of it (invoice factoring).
What is Invoice Factoring?
The lender buys your outstanding invoice for a typical fee of between 0.5% and 5% of the invoice value and then manages your sales ledger, collecting payment from your customer. Your customer will be aware that your business is using invoice factoring. A key benefit, aside from that of cash-flow, is that chasing outstanding invoices will be handled by a third party, which can certainly be appealing for businesses that either do not have the resources to chase payments or would be better off utilising those resources in other areas of the business. One customer we spoke to explained that the fee charged by invoice factoring companies is far more cost effective than employing somebody in an accounts role.
What is the process for invoice factoring?
- The factoring company buys your unpaid invoices at a discount and for a percentage.
- They collect payment of your unpaid invoices from your clients.
- Once the invoice has been settled, the balance is paid to you minus the factoring company’s fee
What is Invoice Discounting?
Is a more discreet method of accessing cash tied up in unpaid/outstanding invoices as your business handles the collection of client payments. Your business can receive funds within 24 hours. Invoice discounting may be more appealing to larger companies who wish to be discreet about invoice financing and/or who already employ an accounts department.
What is the process for invoice discounting?
- Send your invoice to the customer as usual
- The invoice financier pays you a pre-agreed percentage of the invoice, typically up to 90% but sometimes up to 95%, minus the lender’s fee.
- Your business handles the collecting of payment from your client.
- Your business repays the financier the borrowed amount
One of the key benefits of invoice factoring for our business was being able to effectively outsource our accounts roleQuote Goat Business Customer, March 2019
- Fast Funding: Receive funds in as little as 24 hours from the time of application.
- Payment Collection Support: Factoring passes the collections department role onto the lender.
- Flexible Client Payment Terms: Offer clients invoice terms of 30 to 90 days.
- Access to Cash: Access cash from outstanding invoices instantly.
- No Hidden Costs: One pre-agreed fee, typically 1 – 5%. No APR unlike traditional loans.
- Quick Application: It takes just 1 minute to complete your initial application.
Is my business eligible for invoice financing?
Both types of invoice financing have similar eligibility criteria which is typically:
- You must be trading business to business
- You must have a minimum turnover of £50k per annum exclusive of VAT. However if your turnover is less than this you can still apply for free and with no obligation.
An Invoice Discount Finance Example:
Your business has an outstanding invoice for £10,000. Your lender agrees to release 90% of the value of your invoice and charges a fee of 2%.
Once your application is approved, £9,000 is paid to your business and another £800 once the invoice is paid by your customer. A £200 fee is retained by the lender.
Invoice Financing FAQs
What are the minimum requirements to be eligible for invoice financing?
The typical trading time required is a minimum of 12 months, however some lenders can be flexible on this. Most lenders also require that your business has a turnover of £50,000 per year not including VAT, again this can also be flexible. Some lenders may also require you to have a business account with them to be accepted however others do not stipulate this as a requirement.
Can I apply for invoice financing in my own name?
To be accepted you will usually need to be a registered director of the company or the owner.
My business has poor credit, can I still apply?
Yes, we work with a number of lenders, some of whom will provide invoice financing to companies with poorer credit histories.
How much can I borrow against my unpaid invoices?
Invoice financiers will typically lend up to 90% of the value of your invoices, however in some cases you may qualify for 100%. Lenders can offer finance from £5,000 up to £1,000,000.