A Quick Guide To Invoice Financing For Small Businesses

Posted by Emma Robison on Jul 17, 2018 9:56:23 AM
Emma Robison
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A Quick Guide To Invoice Financing For Small Businesses

Every business experiences periods of fluctuating cash flow, but maintaining a healthy balance can become a constant challenge if you offer generous payment terms on invoices, or if customer payments are regularly behind schedule, irrespective of your turnover. Why wait to be paid, when you could benefit from fast access to funds tied up in unpaid invoices with invoice financing?

What Is Invoice Financing?

Invoice financing is a form of secured borrowing whereby unpaid invoices are assigned to a third party financier, such as a specialist lender or a financial institution. The financier advances a pre-arranged percentage of the invoice value, with the balance paid when your customer pays. To fund the service, the financier deducts an interest charge, referred to by financial institutions as the cost of funds, and an agreed service fee.

Why Use Invoice Financing?

Invoice financing is a proactive and cost effective, long term alternative to loans, overdrafts and credit cards. Instead of placing further pressure on your cash flow by accruing debt and increasing your monthly outgoings, invoice financing provides efficient, scalable release of working capital, enabling faster growth as your turnover increases. With full visibility of costs, there are no hidden surprises, and should your customer fail to pay, you’ll gain support in pursuing payment from your finance partner.

Any business that sells to other businesses and issues invoices with payment terms of a minimum of 30 days can take advantage of the following benefits offered by invoice financing:

  • Faster payment on invoices
  • Increased control and visibility of cash within the business
  • Regular availability of cash to fund daily expenses, investment and expansion
  • Ability to improve credit rating through consistently meeting bills on time
  • Reduced requirement to increase debt through secured loans or overdrafts
  • Improved liquidity

How Does Invoice Financing Work?

There are two main types of invoice financing; factoring and invoice discounting.


Factoring is an excellent option for small businesses that do not have a dedicated credit controller, as the factoring company takes responsibility for managing the entire sales ledger and for collecting payment from your customers for all trade invoices in a professional and sensitive manner. Your customer will be aware that payments are collected by a factoring company, thus securing your business for the future and enabling you to offer a superior service as a result of healthy cash flow.

As approval for invoice financing is based on your customer’s credit score, this increases acceptance rates for businesses with a poorer credit rating or minimal trading history. Businesses can also offer more favourable payment terms to quality customers without affecting the speed at which they can access funds.

Some factoring companies provide a confidential service whereby collections are conducted on behalf of your business under your name, should you wish to keep your financial arrangements private from a selection of customers.

Invoice Discounting

Invoice discounting provides fast availability of funds without controlling the invoice collection process. Invoice discounting is a flexible solution for businesses with effective billing and credit control procedures, or for businesses who prefer a personalised approach to payment collection. As the financier does not perform the collections, invoice discounting is often reserved for businesses with a higher turnover to reduce the risk to lenders. As a result, the cost of funds is typically lower than with factoring.

Which Service Is Right For Your Business?

When choosing financial services, it is always beneficial to seek professional advice from an impartial specialist, to help you choose a solution that meets the specific needs of your business and to provide you with clear and accurate information about your options.

For a comprehensive, straightforward introduction to invoice financing click here to download your FREE copy of our Essential Guide To Invoice Financing, Factoring & Invoice Discounting today.

The Essential Guide To Invoice Financing





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