A guide to invoice finance: how it works and benefits for businesses 

Invoice finance, or factoring, is a financing solution that allows businesses to access funds by selling their outstanding invoices to a lender at a discounted rate. This guide will walk you through the process of invoice finance and provide key information to help you understand this financing option.

There are two main types of invoice financing:

1. Invoice factoring – you sell your invoices to the lender, who takes over credit control and collects payments directly from your customers.
2. Invoice discounting – you retain control over credit control and collections, and the lender provides funding against the value of your invoices.

How invoice financing works

Invoice financing involves the following steps:

1. You apply for invoice finance with a lender and provide them with necessary documents such as invoices and accounts receivable ageing reports. The lender will assess your eligibility based on factors like the creditworthiness of your customers and the quality of your invoices.
2. Once approved, you select the invoices you want to finance. The lender verifies the validity of the invoices and determines the percentage of the invoice value they are willing to advance, typically around 80-90%. The lender then provides an immediate cash advance based on this percentage.
3. In the case of invoice factoring, the lender takes over the responsibility of credit control and collections. They manage the collections process, communicating with your customers and ensuring timely payment. Your customers make payments directly to the lender.
4. With invoice discounting, you retain control over credit control and collections. Your customers continue to pay you directly, unaware of the lender’s involvement. You maintain responsibility for collecting payments from your customers.
5. When your customers pay the invoices, the lender receives their payment. With invoice factoring, the lender deducts its fees from the collected amount and pays you the remaining balance. With invoice discounting, you repay the lender the amount advanced, along with any fees or interest charges, as agreed in the financing agreement.

Benefits of invoice finance

Improved cash flow: Invoice finance provides immediate access to funds tied up in unpaid invoices, allowing you to cover expenses, invest in growth or seize opportunities.

Credit control: If you use invoice factoring, you’ll benefit from the lender’s expertise in managing outstanding invoices and reducing payment delays. This input can save you valuable time and let you focus on managing other aspects of your business.

Flexibility: Invoice finance allows you to access funds as and when needed, depending on your cash flow requirements. The amount you can borrow grows in line with your sales.

It’s important to note that the specific terms, fees and processes can vary between lenders and depend on the type of invoice finance chosen (factoring or discounting). It’s advisable to thoroughly review the agreement and understand the costs and obligations involved before entering into an invoice finance arrangement.