How does invoice finance work in the UK?

20 Oct 2022

If you have cash tied up in your accounts receivables, invoice finance can allow you to unlock up to 90% of it, providing you with access to the cash you need to trade and grow with confidence. Read on to find out more about this flexible form of business finance.

How does invoice finance work in the UK?

As a business owner, an unpaid invoice can be the bane of your life, especially when it leads to cash flow problems. Invoice finance offers a solution, enabling you to get paid – sometimes within 24 hours of sending your invoices – by a specialist finance lender.

So, how does it work?

Your unpaid invoice (or invoices) acts as security for the funding, so you don’t have to offer security in the form of equipment or other business assets. Once your clients settle up, the lender provides you with the outstanding amount, minus their fee.

If you're eligible for invoice finance, the percentage of money you’ll be able to unlock from your invoices will depend on the lender’s risk criteria. 

There are a variety of invoice finance providers in the UK today. You can use Funding Options to compare over 120 business finance lenders and match with the right finance options for your needs, without affecting your credit score.

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What is invoice factoring?

Invoice finance falls into two main categories: factoring and discounting. 

As well as lending you up to 90% of your unpaid invoices, an invoice factoring company will manage your sales ledger and collect payments directly from your customers. When your customer pays, the finance company will deduct the cost of their factoring service from the remaining balance of the invoice. 

In a recent Funding Options webinar on the challenges facing the SME community, Jo Drinkwater, Chief Executive Officer and Head of Advisory at Grant McKnight, said they have noticed an appetite currently among some business owners for invoice factoring

What is invoice discounting?

Invoice discounting is similar to factoring; however, instead of the finance company handling your sales ledger and payment collection process, you retain full control. Whether you choose factoring or discounting depends on your needs. 

Invoice factoring may suit you better if you would rather outsource the sales ledger and collection process to the finance company, while discounting might be more appropriate if you don’t want your clients to know you’ve taken out invoice finance. As with any financial commitment, it’s important to be aware of both the benefits and risks. 

Invoice finance benefits

  • Allows you to utilise your balance sheet 

  • Boosts cash flow

  • A quick way to access finance

  • Choice over what you can spend the facility on

  • Doesn’t require you to give away equity

Invoice finance risks

  • Credit checks carried out by the finance provider could affect your credit score

  • You could be held accountable if your customer doesn't pay

  • You'll have to pay fees for the services provided

Who’s eligible for invoice finance?

Lenders will have their own risk criteria, but here are a few things to consider if you’re looking for finance and are considering pursuing invoice factoring or discounting.

1. Are you a B2B business?

Invoice finance tends to be for businesses that trade with other businesses (B2B), as opposed to businesses that trade with individual consumers (B2C). That’s not to say you'll get turned down if you’re a B2C business, but you may be offered less.

2. Do you have a trading history?

Invoice finance is available to businesses that have a trading history; the lender will need to see that you have a track record of issuing invoices to your customers. Make sure that your financial statements are detailed and accurate, as the lender will review them. 

3. How much are you looking to borrow?

There’s no minimum threshold for invoice finance. However, if you need to borrow over £1 million a different type of business finance might be more suitable. 

4. How quickly do your customers pay?

Ideally, your customers should pay their invoices within 30 to 90 days. If they take longer to pay, your application might not be approved. The invoice finance provider will look at your customers’ paying habits and credit rating before making a decision. 

Kickstart your funding journey today

Are you looking to borrow between £1000 and £15 million?

Use Funding Options, the UK’s leading marketplace for business finance, to match with the right finance for your needs. It takes minutes to apply, there’s no obligation and our platform is easy to use. To get started, simply tell us how much you need to borrow, what it's for and provide some basic information about your business!

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