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Accounting Small Business Advice

What is Invoice Finance?

5 Jul 2020

The most straightforward way to answer the question “What is Invoice Finance?” is to say it’s booming. There are several primary reasons for that, and during the past couple of decades, some key events have changed the way small to medium-sized businesses are borrowing.

Firstly, the financial crash back in 2008 significantly transformed the way major banks treated commercial credit applications, and that inevitably changed the way small businesses operated. Secondly, uncertainty surrounding Brexit affected confidence and reduced traditional borrowing in the UK. Thirdly, during 2020, the pandemic has brought chaos to organisations big and small. It’s an ongoing event – the worst and most disruptive in living memory, and the effects on businesses in every sector have been profound.

Traditional lending has been more challenging for newer and smaller businesses to access for a while now. During the pandemic, customers are paying more slowly, and that’s done nothing to decrease the intense pressure on SMEs to continue paying wages and suppliers. Commercial borrowers need a simple and accessible, cost-effective way to maintain their cash flow. All lenders base the cost of borrowing on risk, and freeing up the cash in outstanding invoices represents a relatively low-risk prospect.

What is invoice finance, and how does it work?

Invoice financing is a straightforward way to borrow funds, secured against the value in your unpaid invoices. Once an invoice gets raised, a lender advances a percentage of the invoiced amount to your business (usually around 90%) – and some providers guarantee settlement within twenty-four hours.

Depending on the type of invoice financing you apply for, either you or the lender will perform credit control, and when the invoice gets paid by your customer, you receive the remainder of its value, less the finance fee.

Read More: Everything you need to know about Creditors and Debtors

Invoice discounting versus invoice factoring

The two primary types of invoice finance - invoice discounting and invoice factoring - differ only in terms of who is responsible for collecting payments. For businesses, there are two main factors to consider when choosing one of the two solutions; do we want customers to know we’re using the service? Do we want to outsource credit control?

Invoice discounting is the simplest of the two finance structures. You borrow on the value of the invoice but retain control over chasing payment. With invoice factoring, however, the finance company performs credit control, so your customers are going to know you’ve outsourced the operation.

  • Both discounting and factoring work by advancing a portion of the outstanding payment – usually around 90% of the invoice amount – and then, the balance gets settled once your customer pays the invoice in full.

  • Many lenders in this space will insist your main source of revenue needs to be from B2B sales, not B2C.

  • Invoice financing is available to pretty much all SMEs, from established companies to startups and new ventures.

  • In the case of brand-new businesses, lenders will often specify that an owner or director holds equity in a property.

Related: Small Business Financing

How does invoice factoring work?

  • Works to improve cash flow and make that more predictable.

  • Businesses can outsource credit control and concentrate on production. The finance company takes care of chasing up payment.

Pros of invoice factoring

  • For smaller businesses, having the finance company manage credit control can work well, and free up time to develop new leads or revenue streams.

  • Because the finance company reduces its risk by managing your sales ledger, the bar to access this invoice financing method is lower. Most companies set a turnover-related limit.

Cons of invoice factoring

  • The service isn’t confidential. Some customers may object to the fact you’re outsourcing credit control, especially if you’re a smaller business with a relatively close-knit customer base.

  • The credit control element of invoice factoring costs money, so borrowing costs also get higher than with invoice discounting.

How does invoice discounting work?

  • Allows businesses to predict cash flow better and immediately frees up most of the money contained in unpaid invoices.

  • You manage your own credit control – the method is entirely confidential, and your customers won’t know you’re using invoice finance.

Pros of invoice discounting

  • Invoice discounting is confidential, so while it provides the same finance benefits are factoring, you won’t upset any customers.

  • You carry out credit control your own way, which is excellent if you have different processes for long-term or loyal and trusted clients.

  • There isn’t a credit control element to the cost of finance, like with invoice factoring.

  • You don’t get tied into a contract with invoice discounting – so, you’re free to finance a single invoice when that works.

Cons of invoice discounting

  • Discounting comes with a higher bar for entry – some financiers will specify a minimum turnover in the hundreds of thousands of pounds.

  • Invoice discounting lenders may want to assess your capacity and procedures for credit control before they authorise borrowing.

The Rise of invoice finance – Brexit, the 2008 Financial Crash, Fintech, and COVID-19 disruption

For commerce, it’s been a tumultuous dozen or so years. The financial crash was hugely disruptive for business. There was also obvious and prolonged uncertainty surrounding Brexit negotiations. Yet, even considering both those factors, and taking into account the ongoing effects of the COVID-19 pandemic, that’s not the whole story behind the rise of invoice finance. You also need to consider the emergence of intech when considering how invoice and asset finance have gained so much traction so quickly. Disruption is a great way to describe the effect fintech has had on the traditional lender landscape – and that’s only increased during COVID-19 because cash flow really is the key to survival for many businesses.

Such is the ongoing influence of fintech on lending and the way the future of the industry is perceived to be heading, that many of the big banks now partner with fintech providers, offering innovative products and services that only their agile counterparts can provide. In fact, during the pandemic, many fintech companies were quick to adapt, designing and bringing specialised finance options to market more quickly than traditional lenders could.

SMEs have embraced that innovative approach to lending in 2020 as we blogged about recently – as Brexit, COVID-19, and the effects of the GFC came together to create extremely challenging trading and borrowing environments.

Read More: What is SEIS? - Alternative small business funding

What are the costs of invoice financing?

That depends on whether you choose factoring or discounting, and as previously mentioned, the costs for invoice factoring tend to be higher due to the fact the lender takes care of credit control.

Typical fees for invoice financing are between 0.5% and 5% of the invoice’s value – however, as with all borrowing, your credit rating and other factors may influence the rate you get offered. The size of the invoice you wish to finance can also have an impact on the fee. Larger amounts tend to attract lower fees, while the opposite is true for lower-value invoices.

Who regulates invoice finance in the UK?

The FCA (Financial Conduct Authority) doesn’t currently regulate invoice financing, but UK Finance does have a code of conduct for providers in the space. As with all finance, it’s a great idea to seek advice from your financial officer or accountant before you commit – especially if there’s an ongoing contract involved.

How does invoice financing work?

One of the main attractions with invoice financing is the simplicity of the structure. Your business raises invoices as usual, but then you let the financier know. Once they’ve got all the details, they’ll forward a percentage of the value. That can take anything from twenty-four hours to a week, depending on the invoice finance provider.

You’ll then proceed as per the agreement – if that’s a factoring arrangement, the lender will follow up with credit control according to their practices. If you’ve signed off on a discounting agreement, you’ll pursue payment as normal. When the invoice gets paid, you’ll receive the remainder of the money from the financier – who will deduct their fee. Once you’ve chosen and been approved by an invoice finance provider, repeat applications are easy and quick to arrange.

Can invoice financing help my business?

Invoice financing’s popularity has grown because it’s a relatively simple way to maintain a healthy cash flow in certain circumstances. However, it’s wise to use it as part of your broader cash flow projections and planning. Being reliant on any form of finance isn’t advisable. Still, as a supplement during periods when working capital is low, invoice finance can be a cost-effective solution for paying wages, suppliers, and even retail property rents.

If you’d like to find out more about how our accountants can help cure your cash flow problems and help your business thrive during these troubling times, get in contact with us at 0207 043 4000 or You can also get an instant accountancy quote here.