Invoice finance explained

For companies engaged in business-to-business activities (B2) and facing any cash flow challenges, invoice finance can be a great solution.

This article will guide you through what invoice finance is and how your company might benefit from it.

What is invoice finance?

Invoice finance is a flexible business finance solution. It allows your business to access cash from unpaid invoices, helping to speed up your payment cycle.

Rather than waiting 30, 60, or 90 days for your customers to pay, you can receive a percentage of the invoice upfront. This enables you to bridge the gap between invoicing and receiving payments, ensuring a healthier cash flow for your business.

How does invoice finance work?

Here’s how invoice finance works:

  1. Your business provides goods or services to your customers and raises an invoice as usual.

  2. You send a copy of the invoice to an invoice finance company

  3. Upon approval, you will get an advance of a percentage of the invoice value (typically 90%).

  4. At the agreed-upon payment terms, your customer pays the invoice directly to the invoice finance company. The remaining balance is released to you, minus a small fee for the invoice finance company.

Why use an invoice finance company?

Choosing to use invoice finance can make running your business a lot easier. It’s also a quick solution that doesn’t have as strict eligibility requirements as a traditional bank loan might.

As it gives you fast access to cash, it can help pay for everyday expenses or grow your business without waiting for customers to pay their bills.

What are the different types of invoice financing?

There are several types of invoice financing options available, each suited to different business needs and situations.

Invoice factoring

Invoice factoring allows a business to sell its invoices to a third-party company at a reduced rate. The invoice factoring company then takes on the task of collecting the invoice payments. This arrangement provides the business with immediate cash and transfers the responsibility of credit control to the factoring company, which can reduce the business's administrative workload.

Spot factoring

Spot factoring allows businesses to finance individual invoices, instead of their whole debtor book.This is useful for companies needing quick cash without a long-term commitment, providing flexibility and control over which invoices to finance.

Invoice discounting

Invoice discounting is similar to factoring but with one key difference: the business retains control over the debtor book and invoice collection. This solution is usually confidential, meaning customers are unaware that an invoice financing company is involved.

Selective invoice financing

Selective invoice financing offers businesses the flexibility to choose which invoices to finance. This can be particularly useful for companies with fluctuating cash flow needs. The business will still retain responsibility for their credit control. 

Is your business eligible for invoice financing?

Invoice finance companies have varying criteria, but typically your business will need to:

  • Have some trading history.

  • Maintain a good business credit score.

  • Serve customers who typically pay invoices within 30-90 days.

  • Provide in-depth sales ledgers and financial statements.

  • Supply goods or services to other businesses, rather than directly to consumers.

What are the advantages and disadvantages of invoice finance?

Advantages of invoice finance

Disadvantages of invoice finance

Invoice finance companies immediate access to cash tied up in unpaid invoices, helping businesses manage their cash flow more effectively.

Invoice finance can be more expensive than other types of borrowing, with fees and interest rates potentially higher.

With faster access to funds, businesses can take on new projects, stock up on inventory, or expand operations without waiting for customers to pay their invoices.

If using factoring (where the provider takes on debt collection), the interaction between the factor and your customers could affect customer relationships.

Your business won’t need assets as collateral, typically the outstanding invoices themselves are used as security.

Not all businesses will qualify for invoice financing. It’s not a suitable option for B2C companies.

You can choose whether to retain credit control management.    

Some providers may not agree to finance smaller invoices, which can limit the usefulness of the service for some businesses.

Unlike traditional loans, the amount of funding can increase with your sales. As your business grows and you invoice more, you can access more finance.

The amount of financing and the terms offered depend heavily on the creditworthiness of your customers.

It's often easier and quicker to secure invoice financing than traditional bank loans.

Some invoices, like those tied to contractual disputes or with extended payment terms, may not qualify for financing, limiting the amount of funds that can be accessed.

Compare lenders for invoice finance

At Capitalise we work with over 100 UK business lenders, many of which are specialist invoice finance companies. Our online platform facilitates a comparison of loan terms and conditions from multiple lenders, ensuring that your business can secure the right finance for your business. Sign up for free and get started today!

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