Invoice finance (also called receivables finance) is a type of business funding that allows you to release cash immediately, against unpaid sales invoices, so you don't have to wait for your customers to pay you. This improves your cash flow. There are selective services that allow you to dip in and out without any obligation to use them again.
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An Injection Of Working Capital
Using this type of funding creates an injection of working capital into your business, which you can use for any purpose. You could use the extra money to:
- Finance expansion and growth
- Fund large orders, or negotiate early settlement discounts from suppliers
- Purchase stock, materials or equipment
- Acquire or buy another business
- Pay off creditors, HMRC arrears or staff wages
Improve Business Cash Flow
By using invoice finance you will improve your business cash flow, as you will no longer have to wait for customers to pay. It will help mitigate the effect of late payments from customers. The other benefit is that your customers are still given credit terms, so you remain competitive. You might choose to negotiate supplier discounts for early payment, with the money you now have available.
If you have a whole sales ledger of outstanding invoices to other businesses (B2B), you could raise a significant cash injection by cashing them all in. Alternatively, you can choose to get funding against just a few transactions, that you select, without any ongoing obligation to use the service again. This selective approach can be useful if you only have an occasional need for extra funding.
How Invoice Finance Works
Perhaps you need help getting an invoice finance facility approved? If so we can assist you and ensure you maximise your chances of approval.
This is how invoice finance works (also called IF for short), it generates working capital and improves your cash flow by:
- Releasing money from the cash tied up in your outstanding sales transactions. This could range from 70% up to 100%, but is typically around 85% of the transaction value, depending upon your circumstances and industry sector.
- Allowing you to select transactions to get funded, or to get funding against your entire sale ledger.
- Funding all your transactions gives you the maximum, immediate cash injection.
- Releasing more funding each time you raise new invoices.
It can also:
- Generate increased levels of funding as your turnover, and hence the sales ledger, grows. Bank loans and overdrafts are fixed, so do not work in this way.
- Provide optional help with credit control activity (or you can retain this in-house).
- Provide optional protection against customer bad debts.
Unpaid sales are often the largest and most valuable asset of a business. They are also assets that are frequently overlooked when it comes to raising money. This form of funding seeks to address this by providing revolving finance against the outstanding unpaid sales invoices of the business.
"Revolving finance" means that if your sales ledger is fairly stable in the overall value of debts outstanding, you never have to repay the funding. Instead, as old transactions are paid off (paying off the associated funding), new transactions replace them and top up the amount of money that you have available. As the overall value of your sales ledger increases, so does the amount of funding generated by the prepayment percentage e.g. 85% of the value of your overall debt ledger.
Selective Invoice Finance
If you don't want to fund all your transactions, you can choose "selective invoice finance" and pick which transactions you receive an advance against. You might choose to select batches of transactions or just a single invoice or order. There are no minimums, so you never have to use it again, unless you choose to.
How Prepayments Grow With Your Business
Immediately you raise new invoices (or applications for payment in the construction sector), the funder will provide a prepayment (also known as an initial payment, or early payment) against the gross value of the sale. The financier will provide further prepayments as subsequent sales are made. In this way, the level of funding grows as your business grows and it can dramatically improve the cash flow of your business.
Our research found that 87% of existing users of these services said that it had enabled the growth of their business.
The Process Of Invoice Financing
The detailed process of invoice financing is as follows, this can apply to single transactions or batches:
- You deliver your goods or provide services to your customers as normal.
- You raise your invoice(s) on credit terms e.g. 30 days, so the customer doesn't have to pay immediately.
- You send your invoice(s) to the financier. This is normally electronic, either by file transfer or by uploading your sales ledger from your accounting package automatically.
- The financier gives you, for example, 85% of the value of the transaction immediately.
- Either you can chase the customers for payment, or the financier will undertake the credit control for you (if you choose).
- When the customer pays, you receive the balance of the sale value (for example the other 15%), minus charges.
The infographic below shows an overview of the process:
How Much Cash Could You Raise?
Funding percentages can be up to 100% of the transaction value (minus charges) but as an example, let's assume a prepayment of 85% of the gross transaction value. If your business has an outstanding sales ledger of £100,000 and, for example, and the funder agrees on a prepayment percentage of 85%, your business could receive up to £85,000 of cash funding immediately. The balance of the sale value is still passed to your business once it is paid, less the funder's charges.
To find out how much cash you could raise using IF use our free invoice finance calculator.
How Much Does Invoice Finance Cost?
The costs depend upon the type of facility you want, whether you want any credit control options and the nature of your business. You can choose to get funding against individual sales without any contract, this can cost just a few percentage points of the sale value.
If you want to finance all your sales, via a full book type of facility, the total cost starts from c. £3,000 + VAT per annum. All-inclusive fees like this are available or you might prefer to have a tariff of charges so that you only pay for the services that you use, both options exist.
If you only want to get funding against one, or a few transactions that you select, the cost can be much less. The cost of a selective facility is normally approximately 3 to 5% of invoice values. There may be a small arrangement fee in some cases.
Read our explanation of invoice finance costs. Which also has links to pricing examples according to the size of your business, and the type of facility that you choose. This will give you an indication of the price.
We can provide free, independent advice, and a quotation search service. To use our service either complete the green application form on this page or simply call Sean on 03330 113622 to discuss what you need without any obligation to go any further.
Types of Facility
So after deciding whether you want to discount all or just some of your sales, there are two principal types of service, both of which can be completely confidential (if you wish) so that no one knows you are using the service:
- Invoice discounting. - this is the "funding only" product, You receive funding against your transactions but retain your own credit control function. Confidential invoice discounting is an option that will also ensure that there are no assignment clauses on invoices, or correspondence in the name of your financier so that your customers are unaware of the arrangement. Bad debt protection is available if you want to protect your business against customers being unable to pay you.
- Factoring - with this service, you receive both the funding against your sales and also a credit control support service. This can be a fully comprehensive credit control service so that you don't need to do any of the debt collection yourself. You can save a lot of money by outsourcing this type of function and removing the need to employ credit controllers. Once again bad debt protection is an option (if you want it).
You can receive any of the above services against all your transactions or just against selected ones.
You can also access these services in respect of sales to export customers that are based abroad.
Further Information About Factoring And Invoice Discounting
Below is some further information about both factoring and invoice discounting:
- How To Finance Business Growth - a shareable infographic that shows the link between using receivables finance and growing your business.
- Short Notice Periods And Open-Ended Contracts Without Notice - an article explaining how short notice periods are now available with both whole turnover and selective facilities.
- List of Invoice Finance Companies - a list of the various factoring and invoice discounting providers within the UK market.
- Market Research - our archive of research and price comparisons regarding invoice finance.