What is invoice finance, and how does it work?

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What is invoice finance, and how does it work?

Invoice finance is the generic term given to a form of business financing where a company uses its unpaid invoices as security to obtain funding from a finance provider. It allows businesses to access funds tied up in their debtor book before the customer pays the invoice. It provides an injection of working capital to help improve cash flow and support business growth.

Factoring and Invoice Discounting are both forms of Invoice Finance with the main difference relating to the level of credit control and the way the payments from the customer are handled.

The basic process of invoice finance typically involves the following steps:

  1. Issuing customer invoices for goods or services provided, per usual business practices.
  2. Selling unpaid invoices to an invoice finance provider, usually at a discounted value.
  3. The finance provider advances a percentage (typically 70% to 90%) of the invoice value to the business within 24 to 48 hours.
  4. The business uses advanced funds to meet immediate cash flow needs, such as paying suppliers, employees, or other expenses.
  5. When the customer pays the invoice, the remaining percentage of the invoice value, minus any fees or charges, is released to the business by the finance provider.

Invoice finance can benefit businesses that face cash flow challenges due to slow-paying customers or extended payment terms and need access to funds quickly to support their ongoing operations or growth plans. It provides a flexible and relatively quick financing solution tied to the business’s sales rather than its creditworthiness, making it suitable for companies with limited credit history or poor credit scores.

In the right circumstances Invoice Finance can transform a growing business, in the wrong circumstances it can be the biggest nightmare.  It is therefore important that you consider such a decision carefully and seek professional advice before entering into any agreement.