The Complete Guide to Invoice Finance
Are you a business owner who needs immediate access to working capital in order to cover daily expenses and focus on business growth?
You find that traditional overdrafts and loans have incredibly long, bureaucratic processes, and you don’t want to risk your assets as collateral.
So what do you do?
You get smart and choose Invoice Finance.
You’ve probably heard of Invoice Finance before, but just in case you need to freshen up, this guide has got you covered. In this guide, you’ll find all you need to know about Invoice Finance including its uses, benefits, types, and costs.
So let’s get rolling!
Invoice Finance is a type of Asset Based Finance that unlocks valuable working capital tied-up in unpaid invoices. It is an ideal funding solution for B2B and B2G businesses whose finances lie in their account receivables and debtor balance. With so many available funding solutions, you ask yourself:
What makes Invoice Finance better?
Here’s just a few of the many benefits Invoice Finance offers:
Your assets are safe from being used as collateral, your provider often provides free customer credit checks, and they can also help with credit control support.
Your Invoice Finance provider purchases your valid outstanding invoices, advances you an initial cash installment, and pays the remaining balance minus fees once your customer settles their invoice. You receive access to the cash within 24 hours of submitting your invoice, and the entire process tends to be remarkably hassle-free.
In fact, Invoice Finance is becoming an increasingly popular funding solution for UK businesses. The UK Finance organization reported that between June 2016 and June 2017, nearly 42,000 businesses were using Invoice Finance in the UK, and total client sales on Invoice Finance products increased by 4% to £151.7 billion. Total available funding also rose by 8%, from £29.9 billion in June 2016 to £32.3 billion by June 2017.
Here are the key takeaways from our Invoice Finance guide:
- Uses – Invoice Finance is used to facilitate small to large business activities such as covering daily expenses, paying overseas suppliers, mergers and acquisitions, and buyouts.
- Products – The main Invoice Finance products are Invoice Factoring and Invoice Discounting.
- Services – Your provider can handle collections and credit control if you don’t have the in-house facilities. Most also offer Bad Debt Protection.
Providers – There are over 50 Invoice Finance providers in the UK; they are either independent companies, financial institutions, or crowd sourcing platforms.
Invoice Finance is a flexible funding solution for all types of businesses, from startups that need seed working capital, to large businesses that want to finance a buyout. The funds unlocked from your unpaid invoices can be used to cover daily expenses, fulfill customer orders, and focus on business growth.
Invoice Finance is especially useful if you are a small business that does not have sufficient in-house resources for credit control and collections. Invoice FInance providers give you the option for them to take control of your sales ledger, credit management, and collections on your behalf. As a result, you’re able to fully concentrate on running and growing your business.
Did you know that 86% of SMEs in the UK believe a lack of cash was the key problem facing their business, followed by bad debt, declining sales, and poor credit management?
Invoice Finance provides solutions to all these problems. You immediately unlock 80% to 95% of your invoice value within 24 hours, which allows you to focus on growing your business. Meanwhile, your Invoice Finance provider performs thorough credit checks on your customers, offers credit management services, and additional bad debt protection.
Furthermore, Invoice Finance has become standard practice in certain industries such as services, manufacturing, and distribution, with each of these having over 10,000 clients using Invoice Finance. Therefore, providers often offer industry-specific funding solutions such as construction finance and trade finance.
In fact, from 2016 to 2017 there was a record 38% increase in Invoice Finance use for exporting businesses. As more businesses switch to Invoice Finance, providers continue developing more industry-specific solutions for their unique needs.
Invoice Finance is more than just an alternative funding solution. Your entire relationship with your provider is generally more hassle-free and efficient than traditional banking relationships. Invoice Finance providers take more time to understand your business and discuss your needs, considering factors beyond the numbers.
Invoice Finance is more flexible than traditional bank overdrafts and loans because your Invoice Finance facility grows in line with your sales. Access to immediate working capital gives your business the opportunity to grow, which means that the scale and cost of operations also increases. With Invoice Finance, you don’t have to worry whether you’ll have enough funding, because your available funding automatically grows with your business.
Another benefit of Invoice Finance is the speed and accessibility of your funds. Once you raise invoices to your customers and submit verifiable copies to your provider, they will advance you 80% to 95% of your invoice value within 24 hours.
Most Invoice Finance providers offer entirely paperless methods that further simplifies and speeds up the entire process, giving you even faster access to your funds. You are able to withdraw funds from your online account at any time, and customer service is arguably more personable and accessible compared to large banks.
Invoice Finance providers typically offer Bad Debt Protection or Credit Protection, which can protect up to 95% of your invoice values. If your customer becomes insolvent, your finances are protected and you continue running your business as usual. Most providers also perform free credit checks on your customers to determine their risk and creditworthiness – useful for you to know which customer invoices need Bad Debt Protection.
If your business is small or in the growth stage, you probably don’t have the necessary in-house facilities to properly manage collections and credit control. Even if you are able to, it takes away precious time and resources from you fully focusing on running your business. With Invoice Finance, you can outsource these tasks to your provider, who has experienced and dedicated teams to run your back-office functions.
Your relationship with your Invoice Finance providers is relatively more personal than with traditional banks. You are assigned a Client or Relationship Manager who is your ongoing point-of-contact throughout the entire process. They will have an in-depth understanding of your business and are able to answer questions regarding your Invoice Finance facility.
There are two main types of Invoice Finance: Invoice Factoring and Invoice Discounting. Essentially, both offer the same services except Invoice Factoring gives the provider full control of your sales ledger, collections, and credit control. It is more suitable for small to medium businesses that don’t have the in-house facilities or that want to focus on growing their business.
Some Invoice Finance providers also offer more products such as Single Invoice Factoring or Discounting, where you only raise funds from one individual invoice at a time. It is an even more flexible solution for businesses with occasional funding needs that don’t want to be tied down to long-term contracts.
Invoice Factoring allows you to sell your outstanding invoices to Invoice Factoring providers (also called Factors) to provide immediate working capital for your business needs. Depending on your provider, you receive 80% to 95% of your invoice value within 24 hours. Once your customer settles their invoice, the provider will advance you the remaining funds minus fees.
Your Invoice Factoring provider manages the entirety of your trade debtors.
They handle your sales ledger, credit control support, and payment collections from your customers. This relieves you from the additional burden of performing these responsibilities yourself, and enables you to concentrate on growing your business.
It’s important to note that your customers are notified of your relationship with your provider, who will proceed to communicate with your customers. Before using Invoice Factoring, consider if this disclosure is something you are willing to accept. If not, then Invoice Discounting may be a better choice for you!
Similar to Invoice Factoring, Invoice Discounting (or Confidential Invoice Discounting) allows you to access 80% to 95% of your outstanding invoices value within 24 hours. However, you remain in control of your sales leger, credit management, and collections. Your relationship with your Invoice Discounting provider is also confidential, which means that your customers won’t be aware that you are using an Invoice Finance provider.
Your provider sets up a bank account in your name, which your customer then makes invoice payments to, while you are able to freely use the advanced funds for your business needs.
Due to the fact that you have to manage your own sales ledger and collections, Invoice Discounting is suitable for medium to large businesses with established credit control and collections processes, and don’t need the assistance from Invoice Finance providers.
Single Invoice Finance
Some Invoice Finance providers offer Single Invoice Finance, which covers Invoice Factoring and/or Invoice Discounting services. What this means is you are able to raise funds from an individual invoice, instead of submitting your entire sales ledger.
Single Invoice Finance is much more flexible than regular Invoice Finance because the service is available to you whenever you need to use it. Some providers don’t even require you to enter a long-term contract, instead offering a pay-as-you-go scheme. This solution is suitable for businesses with occasional funding needs that don’t require an ongoing Invoice Finance facility.
What’s more, the eligibility criteria for Single Invoice Finance is typically lower than regular Invoice Factoring and Discounting because the cash advance is much lower in quantity. Providers won’t require you to have an extensive trading history or a high annual turnover, which is ideal if your business is new and still growing.
Recourse and Non-Recourse Invoice Finance
Invoice Finance providers advance funds against your outstanding invoices, which they use as security. Therefore, the primary risk in Invoice Finance lies in whether your customers are able to settle their invoices.
Recourse Invoice Finance means that you take on the credit risk of your customer becoming insolvent and not paying their invoice. If your customer fails to pay, then the Invoice Finance provider will seek repayment from you, which puts your finances at risk.
Non-Recourse Invoice Finance enables you to transfer most of the credit risk onto your Invoice Finance provider through methods such as Bad Debt Protection. Therefore, if a credit-approved customer fails to settle their invoice, your finances are protected and your provider handles the situation on your behalf.
While Non-Recourse Invoice Finance seems like the perfect solution, keep in mind that it will cost more than Recourse Invoice Finance. This is because Non-Recourse Invoice Finance factors in the cost of your provider taking on the risk of your customer failing to pay their invoice.
Invoice Finance costs vary between providers and depend on factors including invoice volume, creditworthiness of your customers, and invoice payment terms. They also differ according to the type of contract you have, since long-term contracts tend to have more recurring fees.
Invoice Finance providers are generally upfront about their costs and fees, and are able to give you an accurate quote after receiving information about your business.
Here’s what you need to know: you will face a minimum of two fees – a service charge and a discount charge.
The service charge is the cost of running your Invoice Finance facility, including credit management and administration. It is normally charged as a percentage of your annual turnover, with typical fees ranging from 0.75% to 2.5%.
The discount charge is essentially an interest rate on the amount lent to you, and is comprised of the UK base interest rate plus commission percentage from your provider. Generally, discount charges range from 1% to 3% (monthly) over the base interest rate.
In addition to these two charges, Invoice Finance providers may also charge other fees such as transaction fees, minimum usage fees, early termination fees, and the additional cost of Bad Debt Protection.
Be sure to read your contract’s fineprint and understand all the potential fees of your Invoice Finance facility so that you don’t encounter any unwanted surprises down the line!
Invoice Finance contracts vary depending on your provider and funding needs. Most Invoice Finance providers offer long-term contracts with minimum usage requirements, some offer monthly rolling contracts, and few offer flexible pay-as-you-go services that don’t require any contracts.
Providers prefer long-term contracts because it locks you in as an ongoing client that will provide a steady stream of payments for them, and increase the gross profit margin of setting up your Invoice Finance facility.
In the UK, there are over 50 Invoice Finance providers, which gives you a wide range of options. Providers differ in type, size, and offerings, which means they have different eligibility requirements. Therefore, not all Invoice Finance providers nor their products are equally suited for your business, and you need to do adequate research to ensure you pick the right one. (Check out our guide to the top Invoice Finance providers and individual reviews of providers!)
In general, there are three types of Invoice Finance providers: independent providers, subsidiaries of financial institutions, and crowdsourcing platforms.
Independent Invoice Finance providers are companies that are entirely dedicated to Invoice Finance, often offering specialist solutions such as construction finance and export finance. Because of their independence, they tend to be more focused and understanding of different businesses, with products available for startups and phoenix businesses that don’t have a stable financial history.
Independent providers are able to offer industry expertise and personable customer service, since they have the time to commit to each of their clients.
Independent providers in the UK include: IGF Invoice Finance, Bibby FInancial Services, and Calverton Finance.
Subsidiaries of Financial Institutions
Subsidiaries of large financial institutions are also a widely used option for Invoice Finance in the UK. These companies are well-funded and have a wealth of available resources including industry experience, large funding lines, and professional credit control support teams.
However, one of their drawbacks is that being part of a financial institution means their eligibility criteria is typically more strict, customer service can be slow, and they may not support new or phoenix businesses as these pose a higher credit risk.
Invoice Finance subsidiaries in the UK include: Barclays Cashflow Finance, RBS Invoice Finance, and Lloyds Commercial Finance.
In recent years, technological developments have allowed for newer innovative forms of Invoice Finance such as crowdsourcing platforms. The idea is to create an online marketplace for your invoices, where you can sell your invoices to institutional investors and receive instant funding. These online platforms are seamless and easy-to-use, with paperless processes that eliminate contractual fees and simplify your relationship with the provider.
Crowdsourcing platforms usually don’t require long-term contracts, instead offering pay-as-you-go schemes with one-off fees. Because of this, they also tend to be much more straightforward and transparent about their services as no contracts means there are no hidden fees.
Crowdsourcing platforms in the UK include: MarketInvoice and Platform Black.
Invoice Finance is an increasingly popular form of debtor finance that can facilitate your business development at any and all stages of growth. It is a flexible funding solution that can provide immediate access to working capital for daily expenses, expansion, and restructuring, without risking your other valuable assets as collateral.
In the UK, there are over 50 Invoice Finance providers that are regulated by the Asset Based Finance Association, who also sets and enforces the ABFA Standards Framework. This enables Invoice Finance providers to offer you first-rate services, and ensures that they are conducting the best possible Invoice Finance practices.
Invoice Finance has many industry-specific solutions to offer, with unique solutions that are tailored to your business needs. A wide range of industries are covered including business services, distribution, wholesale, manufacturing, recruitment, transport, and much more. The breadth and flexibility of Invoice Finance enables it to be a sensible choice for business finance, as you receive more focused and specific solutions from expert providers.
Congratulations! You’ve made it to the end of our Invoice Finance guide and are now ready to explore your options. If you’re interested in more Invoice Finance, be sure to check out our guides on Invoice Factoring and Discounting, as well as our reviews of providers in the UK.