Invoice finance can be a great tool for unlocking the capital already tied up in your business. If you are a business leader that is focused on growth, but are unsure how to fund it, this guide is for you.
Uncovering the ins and outs of invoice finance, this article will explain exactly what invoice financing is, how it works and the benefits that it can offer growing businesses.
Whether you’re interested in a short term solution for enhancing your cash flow, or think invoice finance could free up working capital for you to reinvest in growth, keep reading to find out more.
What is invoice financing?
Invoice financing is where a business sells its unpaid invoices to a third-party lender. The lender provides the business with an advance of around 80-90% of the total invoice value and, once the customer pays the full balance, the lender will then return the balance to the business, minus its lending fees.
This helps businesses to enhance their cash flow, by giving them immediate access to funds that are usually tied up in outstanding customer payments.
Who is invoice financing for?
Invoice financing leverages cash that is tied up in a business’s unpaid invoices, so naturally, it is a great solution for businesses where cash flow is significantly impacted by awaiting these payments.
It is particularly advantageous for companies in industries with lengthy payment cycles, such as manufacturing and consumer goods, but also for those that face significant, seasonal fluctuations in cash flow.
Larger, or more established businesses usually have enough readily available working capital to await customer payment and still execute their growth plans, but for small and medium-sized firms, being out of pocket for any length of time can prevent them from reinvesting the cash and growing their business. Invoice finance makes this possible.
How does invoice financing work?
When a lender provides a business with an invoice financing facility, the lender gives the business an advanced payment of its outstanding invoice(s). The business’s customer then pays the invoice – paying the lender, rather than the business – and once the lender receives this payment, it will deduct its fees and return the remaining balance to the business.
This enables businesses to access cash upfront, but without the hassle of managing loan repayments, as this is covered by the invoice payment and fees built into the facility.
Invoice finance in action:
Let’s say you run a B2B business and have outstanding invoices worth £100,000. You need immediate access to funds, so you approach a lender offering invoice financing. The lender approves your application and provides you with an advance of 90% of the invoice value, which is £90,000.
Your customer then pays the full invoice amount of £100,000 directly to the lender. The lender deducts its fees – let’s say 2%, which amounts to £2,000 – and the remaining balance of £8,000 is returned to your business
What are the benefits of invoice financing?
1. Quick access to cash
Invoice financing offers businesses the advantage of quickly accessing cash by converting unpaid invoices into immediate funds. This supports working capital management, enhances cash flow and enables you to focus on their growth and success, rather than chasing customer payments.
2. No collateral required
Unlike traditional bank loans, invoice financing does not usually require additional collateral or rigorous credit processes, making it a viable financing option for businesses of all sizes and stages. This is because the unpaid invoice is considered collateral by the lender – they will focus more on the quality of your debtors than they will your own business history.
3. More flexibility than traditional business loans
Some invoice finance lenders will offer perks such as pay-as-you-go facilities and no minimum contract terms. This enables greater flexibility and scalability than you would get with traditional business loans, meaning you are not tied into any lengthy contracts and only pay for the facility when you’re actually using it.
4. Reduced risk of non-payment
Finally, some lenders offer additional benefits such as bad debt protection, which reduces the risk associated with bad debt and/or customer non-payment.