When a third party agrees to buy your unpaid invoices, giving you the advantage of having the money upfront and available for immediate use.
The UK has the biggest invoice finance market in the world, but the finance landscape is changing. Invoice financing is becoming more and more popular in the USA and other European countries.
Business usually applies for invoice finance when they are looking to expand, cover gaps in cash flow or if they’re looking to move their current business. When you are searching for an invoice, you need to take things into consideration, such as the prices on offer, how long you want your contract for and what the service will be like for you and customers.
The service lenders provide can be very different depending on their size. For instance, a larger lender would be able to offer finance for international trade, whereas a smaller lender may not have the appetite or resources to offer this.
Types of invoice financing:
Factoring is where you sell the whole ledger to a third party company (factor), which allows you to get the funds upfront and almost instantly. The third-party company is then responsible for collecting the money owed by your partners/customers.
- An instant boost to your cash flow
- The providers are experts in billing, so they may be more efficient than you in collecting your revenue
- Frees up valuable time as you will no longer be required to manage your billing
Invoice discounting is where you borrow money on a short-term basis to improve business, which allows the business to avoid delays whilst it waits for the money owed by customers. The benefits of invoice discounting are;
- Customer and partner relationships will not be lost or damaged
- Your cash flow is immediately boosted
Recourse and non-recourse: This is the way of referring to who covers any shortcomings in case a customer or partner fails to pay the invoice value.
Recourse: You are responsible for covering any costs that your customers or partners cannot.
Non-Recourse: The lender is responsible for any shortcomings, and will ensure you are paid.
What you need to know
When it comes to your contract and the length of it, it is suggested that you do not prolong it. An 18-month contract is the average duration of contract length, but it is highly advised that if you can complete it in less time you should.
The business owner and the lender must reach a decision – taking into account your financial commitments – which leaves them both happy for the duration of the contract length.
1. Service fees
Service fees are paid monthly and are a percentage of your turnover.
2. Discount rates
A payment made for any advances you receive from the lender. The duration of this depends on how long your payment terms are.
On top of service fees and discount rates, there are ‘disbursements’ fees which include things such as; paperwork, payments etc. Some examples include copying reports, audit visits and third-party payments.
Applying for invoice finance
When applying for invoice finance, you need to ensure the lender is the best match for your company, otherwise, it can be time consuming and expensive. Businesscomparison.com allows you to compare top invoice finance providers in the space of a minute. We simply ask a few questions to start you on your invoice finance journey.
- What is your outstanding invoice value?
- How much would you like to borrow?
- What is your annual turnover?
- What is your business type?
- What is your business name?
You will then need to fill out a small section which includes your name, email address and your contact number. Based on this our partner will be able to start looking for the right solution for your business.
Invoice finance is not always simple, so feel free to call and speak to our partners who can explain exactly how this could work for you.
If in doubt please contact an accountant to discuss your options.