How Does Invoice Finance Work?

If you have a business, you’ve undoubtedly heard of invoice finance. This term is used to describe the process by which businesses sell their invoices to a third party for a small fee. Maybe you’re tired of chasing up invoices and you’d like to use this service yourself! Read on to find out how invoice finance works, its pros and cons, and how you can arrange it for your business.

When you use an invoice finance service, you pass your invoices to a service provider who will pay you a slightly reduced value on each invoice. In some arrangements, you have to continue chasing up invoice payments. In others, the provider will even do that for you!

What Is Invoice Finance?

It’s easy to see how invoice finance would become a successful industry. Businesses require regular cash flow to grow, and sadly, invoices aren’t always paid in a timely manner! Although businesses must pay a fee to use this service, reducing their total income, income finance does ensure that money is received on schedule. This might be desperately needed, for example, to pay wages or to buy supplies for the next client’s project.

The invoice lender usually pays an agreed percentage up front and the rest, minus a fee, later. Businesses may choose to use this service for all their invoices or on a one-off basis when a particular client is dragging their feet on a payment! Different lenders have different terms and conditions, so you should research your options thoroughly before approaching an invoice finance service provider.

Who Should Consider Invoice Finance?

When a business uses invoice finance, they suffer a loss on what they were projected to earn from the invoice. Why would they agree to do so? Because it’s more important that they receive the majority of the sum fast than it is for them to receive the sum in its entirety. If this is also the situation of your business, you might consider invoice finance as the solution to your problems.

Imagine the scenario: your business owes suppliers or landlords or employees some money, but you still haven’t been paid the huge client invoice that would permit you to make those payments. It’s easy to see how slow invoice payment can have a terrible effect on a business!

This is where invoice finance comes in to save the day. By providing you with at least some of the money straight away, your business can handle those urgent payments. Yes, it’s a loss, but it’s a necessary one for the growth (or maybe even survival) of your business.

Is Invoice Finance Suitable For Small Businesses?

Small businesses are likely to be especially affected by the late payment of an invoice. They usually don’t have lots of resources saved up to sustain a long period without payment. If your small business is having cash flow problems due to late invoice payments, then invoice finance can help you meet your monthly commitments at the very least. This is why small businesses might particularly benefit from invoice finance, although it does require surrendering a small percentage of the total sum to a lender.

What Are The Types Of Invoice Finance?

There are two main types of invoice finance. One is invoice discounting, which is confidential, and the other is invoice factoring, where the customer will be aware that you’re using an invoice finance service. The advantage of invoice factoring is that the service provider will chase up the invoice on your behalf, freeing you to focus on other business priorities. They also take responsibility for credit control and receipt of payment.

How Much Does Invoice Finance Cost?

Invoice finance is convenient, but it does come with a cost! Rates will vary between invoice finance service providers, so shop around for the deal that best suits your business needs. You should expect to pay something between 0.75-2.5% of your invoice amount to enjoy this service.

Usually, invoice discounting is cheaper than invoice factoring. This is because invoice factoring has added benefits, like the lender taking over the invoice payment process and chasing the client up directly. It’s up to you whether you think saving this time and effort is worth the money, but you can see why many business owners might!

What Is The Difference Between Invoice Financing And Factoring?

Invoice financing (or discounting) and invoice factoring have a couple of key differences. Invoice factoring is more expensive, for a start. When you choose invoice discounting, you’re still responsible for contacting the client and ensuring payment of the invoice. Invoice factoring removes that responsibility and businesses pay a little more for the lender to take on credit control and contact duties.

For this reason, credit factoring might be the best solution for a business that’s struggled to enforce invoice payments in the past. Although you’ll pay a little more for the service, it’s certainly better than receiving nothing at all! Some lenders require credit insurance to provide this service, so check this before you commit. In general, smaller businesses prefer invoice factoring and big businesses prefer invoice discounting, because they have the resources and processes to ensure payments are made.

Invoice finance continues to evolve all the time, though, so it may not stay this way for long!

What Is Single Or Selective Invoice Finance?

Single invoice finance is exactly what it sounds like: invoice finance but for one single invoice as opposed to invoice factoring which tends to be a comprehensive service, including every invoice that the business receives. This is a good option if you’re struggling to get one specific invoice paid – businesses don’t have to commit to long-term invoice financing this way, they simply pick and choose which ones they’ll cash in at a cost.

You may also hear single invoice financing referred to as spot factoring, selective invoice discounting, and spot invoice finance. There are many names used to describe the same service.

Is Invoice Finance Regulated In The UK?

At the moment, invoice finance isn’t regulated in the UK, which has been a source of debate. If it was to become FCA regulated, the application process could be expensive, which would undoubtedly raise prices for businesses who want to use it.

The UK invoice industry body AFBA has a code of conduct and Ombudsman process, but only 0.03% of clients made a complaint in its first year of operation.

How To Arrange Invoice Finance

To arrange invoice finance, contact a service provider. The process will be fairly straightforward, but make sure you fully understand the terms of the deal – especially the percentage you’re expected to pay on each invoice and their turnaround time for making payments to you.


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