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Invoice finance


Author: Myles Robinson - Advisor

Posted: May 31, 2022

Invoice finance explained – Full guide on who to use in the UK

Invoice financing is a method of borrowing money that is based on the amount your customers owe your business.

This works by using unpaid invoices as money that you will receive, instead of waiting for payment terms.

These could be anywhere from 14 days up to 90 days, or more. Invoice financing allows you to receive the most cash right away, so you don’t have to wait for payment.

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What is invoice financing?

Invoice finance is easy to understand. Instead of waiting for customers to pay your invoices, lenders advance most of the value right away. This means that you are paid quicker for work completed, so you can concentrate on your business.

Invoice finance is available to businesses that regularly invoice for work. Invoice financing is one of the most effective ways to reduce cash flow problems and get paid more quickly for work completed. It’s a great way to make sure your business has cash flow so you can continue growing without worrying about your finances.

Invoice finance provider benefits

Invoice financing is like any other funding option. There are pros and cons. There are some advantages to choosing either option:

  • Quick cash for your business-The obvious advantage to invoice discounting is the ability to quickly raise cash for your business. You can get it as soon as the invoice is issued. It can be used to grow your business, pay wages or buy more stock.
  • Faster turnaround – Invoice financing is much faster than other types of business loans. By submitting invoices to invoice financing, you can avoid waiting for payment again.
  • No risk to your assets Invoice financing is an unsecured loan that replaces your invoices. You don’t need to give up any of your company’s physical assets.
  • Increases credit sales Invoice discounting can convert credit sales to cash. This allows SMEs to experience faster growth and development.
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Different types of invoice finance providers

Businesses have two options for invoice financing: invoice discounting or invoice factoring. Businesses have the option to decide how much control they want over their finances with both finance products.

Both products offer the flexibility you need to manage your cash flow or let the lender do it for you.

Let’s have a closer look at two product categories in invoice finance.

Invoice Factoring is where a lender is most involved. You can rely on them to provide credit control services to make sure your customers pay on time.

Listed below are some key points to be aware of:

  • Customers will be able to tell that you use a factoring service
  • Potential customers can be credit checked by factoring providers
  • It is easier for small and early-stage businesses to secure financing


Invoice Discounting is where you control the credit for any payments made to your account. This is the easiest form of invoice financing and requires more work from a business. However, it can be time-consuming.

The following are key features of invoice discounts:

  • For businesses with a higher turnover, invoice discounting is usually available.
  • To ensure that customers pay on time, you’ll need to maintain your credit control.


Restrictions on invoice financing facilities

Invoice financing is a type of loan that you can consider, but there are some things you need to keep in mind. The following are some of the most important restrictions that business owners should consider:

  • Customers will need to be from other businesses– Invoice finance is not available for commercial invoices. This means that your customers must be other businesses and not the general public.
  • Invoice factoring – You will have to chase payments if you apply for invoice factoring. This could impact your client relationships and increase the risk of causing damage.
  • Longer-term expenses- While invoice financing can be a great way to provide cash flow for businesses in the short term, it can also have long-term financial costs. Factoring invoices can be a great way to save cash. However, you need to take into account the interest rates and processing costs of lenders.

Invoice financing has many advantages, but there are also some things you should consider.

There are other options available from invoice financing companies if you aren’t sure what option is best for your business, or if you need something more flexible such as unpaid invoices insurance.

Spot factoring and select invoice financing

Spot factoring lets you select specific invoices to finance with selective invoice finance. You can choose to take an ad-hoc approach and receive funding as you need it.

Because they are not full-facility products, selective invoicing products differ from discounting and factoring. You can select which invoices to finance and continue with normal business as usual.

This is a great option for companies that have a clear understanding of their cash flow needs. However, it can be more difficult than discounting or factoring to secure the money. Invoice finance regardless of the facility you choose can help improve your cash flow.

Because they aren’t fully-facility products, these products are different from discounting and factoring. You can pick and choose which invoices to finance and then deal with the rest of the invoices as usual.

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Here’s an example of invoice factoring in business

Sarah’s Interiors Ltd is working on a major new project. Sarah is aware that she will need to purchase additional materials and hire another staff member to complete this job. However, she won’t get paid until it’s completed.

Sarah has been owed PS5,000 by an old client for a completed project. However, the invoice has a payment term of 30 days. Sarah agrees to an invoicing finance agreement that will pay her 85% upfront and the remaining fees and charges at 3.3%.


Businesses can release up to 95 per cent of the invoice’s value within 24 hours. Instead of waiting for customers to pay, they don’t have to wait 30, 60, or 90 days.

While this may sound like the best option for your company, there are some drawbacks to using an invoice financing facility instead of traditional funding sources such as a bank overdraft or loan.

To help you decide if invoice finance is right for you, we’ll take a closer look into the benefits and drawbacks.

Benefits of invoice finance

Invoice financing offers a unique set of benefits that are unmatched by any other source for business finance.

(1) Increased cash flow

Invoice finance has many advantages. The main reason so many companies choose to use it is the positive impact on cash flow. Businesses are better able to quickly release funds held in invoices and take advantage of new opportunities.

(2) The confidence to extend payment terms

Smaller businesses can be held back by waiting 30-60 or 90 days to receive payments. Customers may leave if they are not offered payment terms that are standard in their industry.

Businesses can extend payment terms to customers using invoice finance without worrying about how it might affect cash flow.

(3) Funding is available quickly

A provider can usually set up an invoice finance facility within one week. Once an arrangement has been made, funds can usually be released from invoices within 24 hours after they are issued to customers. This allows you to quickly respond to cash flow shortfalls and raise funds to pay for other business expenses.

(4) The majority of businesses satisfy the qualification requirements

Invoice finance is much easier to get than other forms of funding. Invoice finance is available to most companies that do not have any financial problems and have good customers with no adverse credit records. For startups and small businesses that are unable to access traditional credit sources, factoring can be a viable source of financing.

(5) Your business’s growth will dictate the amount of money you can borrow.

The credit line is determined by the invoices’ value and quantity. This means that the amount of funding available to you will increase in line with your revenues. Invoice finance is a financial platform that supports your future growth. You can also access more capital than what you might get from a loan or bank overdraft.

(6) Security is not required

Invoice finance agreements do not require assets to be secured. In many cases, the invoice is sufficient to provide only security. Invoice finance can be an option for small businesses with limited assets that cannot access other financial products.

The disadvantages of invoice finance

There are always drawbacks to any source of financing. You should know that invoice finance is not for everyone and can have a variety of drawbacks so you can make informed decisions.

(1) It solves an extremely specific problem

Invoice financing is specifically designed to address the issue of insufficient cash flow. This type of finance is not suitable for customers who pay their invoices on time and under reasonable terms. Other forms of financing may be better if you need capital to purchase new machinery and equipment.

(2) It might be more expensive than other types of finance

Invoice finance is now more affordable than ever as the competition has increased. It may not be the most affordable source of financing. It is a good idea to get quotes from several invoice finance providers so you can compare their costs with other credit options.

(3) Customers might be aware that an arrangement exists

Customers may not be aware that there is an invoice financing facility. It all depends on whether you choose to factor or discount.

Factoring companies are responsible for collecting payments from customers and will deal directly with them.

This could cause you to lose the customer relationship. Invoice discounting allows businesses to keep responsibility for collecting payments, so customers don’t know that the arrangement exists.

(4) Customers must come from other businesses

Invoice financing is not available for commercial invoices that are sent to another company. This type of financing is not available to businesses that sell products or services to the public.

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