How can you fund slow paying invoices?

Invoice finance is a way to fund slow paying invoices without having to wait for your clients to pay.

Questions often asked include;

What is invoice finance?

It is a type of business finance offered to companies who want to release money tied up in outstanding invoices.

There are two main types of invoice finance

  • Invoice Factoring - The lender will carry out invoice administration and chase any outstanding invoices
  • Invoice discounting - You carry out invoice administration and oversee your debt ledger

There are many lenders who specialise in invoice finance, with a range of options available.

How much you can finance per invoice varies between lenders, however most will finance up to 90% of the total invoice amount.

What are the benefits of invoice finance?

  • Consistent income - No longer waiting for clients to pay takes the uncertainty of when you are going to be paid
  • Reduced administration - When using invoice factoring the lender carries out all the leg work
  • Low cost finance - Fees and interest can be lower than some business loans depending on your company and credit status
  • Only pay for what you use - You only need to pay fees and interest on invoices financed

The main benefit of invoice finance is being paid quicker without having to wait on clients paying you what they owe.

How does it work?

How the finance works differs slightly depending on what type of invoice finance you are using, factoring or discounting.

When using factoring the lender will take over your sales ledger and oversee collecting and processing payments. Your clients will pay the lender directly.

With discounting you will remain in charge of your sales ledger and still collect payments from clients. It is then your responsibility to pay back the lender what you owe them.

However, the common operating model is

how invoice finance works

  1. You raise invoices and send to client and lender
  2. Lender pays you up to 90% of invoice total
  3. Clients pays and lender deducts fees
  4. You receive remaining balance

Invoice discounting tends to be cheaper than factoring as you carry out all administration of invoices and payments. 

Whether you opt for factoring or discounting, there are two further options available to you, non-recourse and recourse finance.

What is non-recourse financing?

If your client fails to pay their invoice the lender will write off the debt, you will not be required to pay back what the lender has already paid you.

Non-recourse financing is more difficult to be approved for as when using this type of finance, the lender is liable for any unpaid invoices.

It is more difficult to obtain due to the increased risk to the lender of unpaid invoices.

What is recourse financing?

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Recourse finance is the opposite to non-recourse as you are liable for any unpaid invoices.

If your client does not pay you then you are required to pay back the full amount financed by the lender.

Due to the lower risk for the lender, this type of invoice finance is easier to obtain.

How much does invoice finance cost?

The cost of invoice finance varies between

  • What type of facility - discounting or factoring
  • The lender
  • Your credit status
  • Time it takes client to pay

The common fees and costs associated with invoice finance are interest of amount financed and service fees.

Factoring Discounting
Finance Interest 1.15% to 4.5% 1.15% to 4.5%
Service Fee 0.75% - 2.5% 0.2% - 0.5%

There are higher fees associated with invoice factoring as the lender takes control of payment collection and processing.

Many organisations will opt for factoring due to the decreased level of administration regarding invoices and chasing payments.

How do you get paid?

With an invoice finance facility in place, you still send your clients invoices directly as well as the lender.

Once the lender receives the invoice, they will pay you up to 90% of the invoice amount.

With factoring, your client pays the invoice directly to the lender. The lender will then pay you the remaining balance less their fee.

With discounting, your client will pay you directly, you then pay the lender what you owe them. This will be the amount already financed plus their fee.

For example, you send a client an invoice for £50,000, you have a facility in place for 80% of invoices and am overall fee of 2%.

The lender will deposit £40,000 in your bank account in as little as 24 hours of receiving the invoice.

You client pays the invoice, you receive the remaining 20%, £10,000 less the lenders fee of £1,000.

This leaves you with a total payment of £49,000.

Will your clients know you are using invoice finance?

Whether your clients are aware of you using invoice finance depends on which type of facility you take out.

Factoring Yes, the client is aware as they pay the lender directly
Disclosed Discounting Yes, the client will know you are using invoice finance
Confidential Discounting No, the client will not know you are using invoice finance

What is involved in applying for invoice finance?

  • We can lend to any trading business that invoices on a business to business basis (B2B)
  • You must have a minimum turnover of £100,000 per annum and take a minimum facility of £25,000
  • There is no maximum

When you sign up to an Invoice Finance provider, they will take a first charge debenture over the book debt in the business.

You will raise an invoice to them once issued to the debtor and they will process this within 48 hours of receipt.

Then depending on your facility type, when the invoice has been paid, they will provide you with the rest minus their fee.

You will have a dedicated account manager that will work closely with you and support your business in this transition.

They provide you with an online portal where you can upload your invoices and drawdown on all funds.

Updated: July 01, 2020