Invoice finance is a type of commercial funding used by B2B companies. Working with an invoice finance provider, a business can release working capital from unpaid customer invoices as soon as they are raised, rather than waiting for them to be paid.
Businesses with an invoice finance agreement typically access up to 90% of their invoice value up front, providing an immediate cash injection, as well as improving liquidity over the longer-term. This type of flexible funding is useful to businesses who want to improve cash flow.
Also known as accounts receivables finance, invoice financing solutions can be used to fund day-to-day operations, provide access to additional working capital or fund larger transactions, like acquisitions.
Is invoice financing a good idea?
Invoice finance is popular with businesses in a range of sectors because it can improve cash flow quickly. It bridges the gap between an invoice being raised and the customer payment, providing a regular and reliable working capital injection.
According to the latest Close Brothers Business Barometer, a significant percentage of businesses in the UK and Ireland are unfamiliar with funding options outside of traditional banking. The research, which surveys senior SME decision makers, found that just 51 per cent were aware of invoice finance and even fewer knew about asset based lending (ABL).
These figures highlight that many established businesses do not know how invoice finance could support them or the benefits it provides. However, invoice financing could be a good idea for any business that wants to access additional working capital.
How does invoice finance work?
Invoice finance works simply: a business raises a customer invoice, they receive a percentage of the value up front from their invoice finance provider and, once the invoice has been settled, they receive the remaining amount, less a pre-agreed fee.
There are two types of invoice finance and both are straight-forward:
- Invoice discounting releases the value of customer invoices as soon as they are raised while the business continues to liaise with customers directly and collect payments themselves.
- Invoice factoring releases capital from customer invoices as soon as they are raised and the business is supported by a credit management team, who will look after customer payment collections on their behalf.
What are the benefits of invoice finance?
This type of funding enables business to leverage the value of their sales ledger and can support cash flow management.
The benefits of using invoice finance include:
- It’s quick and easy to implement, providing fast access to cash
- It provides instant access to the value of outstanding customer invoices, rather than waiting to be paid
- It can reduce the impact of late payments because businesses receive the capital owed to them upfront
- Facilities are secured against a common B2B asset, the company sales ledger, providing extra stability and making it accessible to many businesses
- Invoice finance funding increases in line with your turnover, so as you grow, the working capital available to you does too
- Businesses choose how many they wish to draw down from their available facility at any one time, enabling them to stay in control
