What is Invoice Finance?

Invoice finance, also known as invoice factoring, is a financial solution that helps businesses get paid faster for goods and services instead of waiting 30, 60, or even 90 days for a customer to settle their invoice. Essentially, a company can sell its invoices to lenders who advance most of the invoice’s value immediately.

Let’s break it down with an example.

Everyday Payment vs. Business Transactions

Think about buying a pint of beer at a pub. The bartender pours your beer, you pay immediately, and then you enjoy your drink. This is a typical business-to-customer transaction involving instant payment.

Now, consider a business scenario. Suppose you own a company that makes pencils. You receive an order worth £100,000 for one million pencils. You ship the pencils and send an invoice for £100,000, which legally obligates the buyer to pay within a specified period—say, 30 days.

While the purchasing company benefits from waiting 30 days to pay, you still need to cover your wages, bills, taxes, and restock materials. Waiting can strain your cash flow. This is where invoice finance comes in—it allows you to access most of that £100,000 immediately.

Benefits of Invoice Finance

Invoice finance offers multiple advantages, especially for small and medium-sized businesses:

1. Quick Turnaround

Unlike other funding options, invoice factoring enables businesses to receive payment shortly after delivering goods or services, rather than waiting weeks or months.

2. Immediate Cash Flow

Once an invoice is raised, cash can be made available instantly. This money can be strategically used to pay suppliers, settle bills, or reinvest in the business.

3. Boosts Credit Sales

With faster access to cash, companies can confidently extend credit to customers without worrying about tying up resources. This is particularly valuable for SMEs reluctant to take on debt to fulfill large orders.

4. No Risk to Assets

Unlike traditional loans that require collateral, invoice finance does not put company assets at risk. If a payment defaults, your business assets remain protected.

How Invoice Factoring Works

Invoice factoring companies buy unpaid invoices at a percentage of their value. The difference between the amount advanced and the total invoice is their fee.

In addition to providing immediate cash, these companies also handle:

• Credit Control – Ensuring invoices are paid on time, saving your company the hassle of chasing payments.

• Credit Assessment – Checking if a buyer can realistically pay within the agreed period.

• Legal Expertise – Managing overdue payments, particularly helpful for small businesses hesitant to pursue legal action.

For businesses unable to access bank bridging loans, invoice finance offers an excellent alternative to maintain smooth cash flow.

Is Invoice Finance Right for Your Business?

Before exploring invoice factoring, consider the following:

• B2B Only: Invoice finance is available only for business-to-business transactions. Your customer must be another company, not an individual.

• Client Relations: The factoring company manages debt collection, which may affect customer interactions.

• Costs: While a great short-term solution, invoice factoring involves fees and interest charges.

Real-World Example

Returning to the pencil company:

• The company sells one million pencils for £100,000.

• An invoice factoring company offers 85% of the invoice upfront.

• Total fees amount to 3%.

Here’s the breakdown:

• Advance payment: £85,000 (within a couple of days)

• Invoice paid by buyer: £100,000 goes to the factoring company

• Factoring fee: £3,000

• Remaining balance to pencil company: £12,000

This way, the company hires extra staff, purchases more materials, and avoids cash flow problems, while the factoring company earns its fee.