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Invoice financing: What is it and how could it benefit you?

Invoice finance can be a great tool for unlocking the capital already tied up in your business. If you are a business leader that is focused on growth, but are unsure how to fund it, this guide is for you.

Uncovering the ins and outs of invoice finance, this article will explain exactly what invoice financing is, how it works and the benefits that it can offer growing businesses.

Whether you’re interested in a short term solution for enhancing your cash flow, or think invoice finance could free up working capital for you to reinvest in growth, keep reading to find out more.


What is invoice financing?

Invoice financing is where a business sells its unpaid invoices to a third-party lender. The lender provides the business with an advance of around 80-90% of the total invoice value and, once the customer pays the full balance, the lender will then return the balance to the business, minus its lending fees.

This helps businesses to enhance their cash flow, by giving them immediate access to funds that are usually tied up in outstanding customer payments.


Who is invoice financing for?

Invoice financing leverages cash that is tied up in a business’s unpaid invoices, so naturally, it is a great solution for businesses where cash flow is significantly impacted by awaiting these payments.

It is particularly advantageous for companies in industries with lengthy payment cycles, such as manufacturing and consumer goods, but also for those that face significant, seasonal fluctuations in cash flow.

Larger, or more established businesses usually have enough readily available working capital to await customer payment and still execute their growth plans, but for small and medium-sized firms, being out of pocket for any length of time can prevent them from reinvesting the cash and growing their business. Invoice finance makes this possible.


How does invoice financing work?

When a lender provides a business with an invoice financing facility, the lender gives the business an advanced payment of its outstanding invoice(s). The business’s customer then pays the invoice – paying the lender, rather than the business – and once the lender receives this payment, it will deduct its fees and return the remaining balance to the business.

This enables businesses to access cash upfront, but without the hassle of managing loan repayments, as this is covered by the invoice payment and fees built into the facility.


Invoice finance in action:

Let’s say you run a B2B business and have outstanding invoices worth £100,000. You need immediate access to funds, so you approach a lender offering invoice financing. The lender approves your application and provides you with an advance of 90% of the invoice value, which is £90,000.

Your customer then pays the full invoice amount of £100,000 directly to the lender. The lender deducts its fees – let’s say 2%, which amounts to £2,000 – and the remaining balance of £8,000 is returned to your business.


What are the benefits of invoice financing?

1. Quick access to cash

Invoice financing offers businesses the advantage of quickly accessing cash by converting unpaid invoices into immediate funds. This supports working capital management, enhances cash flow and enables you to focus on their growth and success, rather than chasing customer payments.

2. No collateral required

Unlike traditional bank loans, invoice financing does not usually require additional collateral or rigorous credit processes, making it a viable financing option for businesses of all sizes and stages. This is because the unpaid invoice is considered collateral by the lender – they will focus more on the quality of your debtors than they will your own business history.

3. More flexibility than traditional business loans

Some invoice finance lenders will offer perks such as pay-as-you-go facilities and no minimum contract terms. This enables greater flexibility and scalability than you would get with traditional business loans, meaning you are not tied into any lengthy contracts and only pay for the facility when you’re actually using it.

4. Reduced risk of non-payment

Finally, some lenders offer additional benefits such as bad debt protection, which reduces the risk associated with bad debt and/or customer non-payment.


What are the disadvantages of invoice financing?

1. Fees

Depending on your business model, you may be charged higher interest rates with an invoice finance facility than you would a traditional bank loan, which can mean it is not the most cost-effective finance option in the long run.

2. Concentration limits

Some lenders are averse to financing businesses with a higher debtor concentration – in this instance you will need to work with a specialist lender that understands this is the norm in certain sectors.


How to apply and qualify for invoice financing

1) Ensure your business fits the general profile of a firm that would benefit from invoice finance – for example, having outstanding invoices from customers

2) Research different invoice finance providers, considering their individual eligibility criteria, pricing and additional features

3) Gather all necessary documents, including financial statements and payment history, to support your application and be prepared to provide any additional information or documentation a lender may request

4) Review the terms and conditions of the financing agreement carefully before signing, paying attention to factors like recourse, fees, and interest rates

5) Once satisfied, sign the agreement, accelerate your cash flow and get your growth plans going!


Use invoice finance to get growth going

Invoice financing can benefit businesses of all sizes, but particularly those that are less-established and have their eyes set on growth. By converting your outstanding invoices into cash, you improve cash flow and free up the working capital needed to fuel your business’s growth.

Whether you’re a small business looking to bridge the gap between invoice payments or a larger company seeking more headroom in your cash flow to reinvest in growth, invoice financing could provide you with the capital you need.

To learn more about how invoice financing works and whether it’s the right fit for your business, book a call with one of our lending experts, who will be more than happy to help. Alternatively, apply through our website, or get in touch directly.

Frequently Asked Questions

Invoice financing offers immediate cash flow by advancing funds based on unpaid invoices. It helps businesses effectively manage working capital and address cash flow gaps, eliminating the wait for customer payments. This financial solution provides flexibility and scalability, as funding can increase in line with sales growth and if working with a lender like Growth Lending, you only pay for what you use, with no minimum contract.

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Some alternatives to invoice financing include traditional bank loans, asset-based lending using collateral, crowdfunding and trade credit, where suppliers provide delayed payment options. These options offer different ways for businesses to secure the funding they need.

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The cost of invoice financing can differ based on the provider and agreement terms. Generally, fees range from 1-5% of the total invoice amount. Additional charges like application or monthly service fees may apply. It’s crucial to thoroughly review all terms and fees before finalising an invoice financing agreement.

The benefit of working with a lender like Growth Lending is that businesses are charged on a pay-as-you-go basis and so only pay for what they use or need.

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