How does invoice financing work?

Wednesday 12th January 2022

Invoice financing is becoming a more and more popular solution to the cash flow problems that many companies can face. Chasing up unpaid invoices is never a fun task so it’s unsurprising that entrepreneurs around the world are lining up to take some of the weight off with financing plans.

But what exactly is it and how does invoice financing work? We’ve come up with this handy guide for you to understand a bit more about one of the most convenient ways to chase an invoice.

What are the essentials of invoice financing?

Invoice financing, at its most fundamental level, sees a business sell their invoices to a financing company for a certain percentage of the overall invoice sum.

The most basic form of invoice financing is called invoice discounting and it looks like this:

  1. A business will invoice a client for services rendered as they normally would.
  2. They then pass on the invoicing information to an invoice finance provider who pays a percentage of the invoice to the business. This percentage is agreed beforehand, and the percentage is normally paid within a few days.
  3. The business then chases the invoice from the buyer as normal.
  4. When the buyer pays their invoice, the rest of the invoice amount will be paid to you by the invoice finance provider.

Another form of invoice financing is called invoice factoring which sees the invoice finance provider collect the invoice payments on your behalf, thereby seeing you removed from the invoicing entirely. This can see the provider take a bit more of a percentage or charge an extra service charge, but many businesses see this as money well-spent.

The invoice financing facility works particularly well for those business who find that their resources and the time they spend on chasing invoices is having a detrimental effect on their operations and their profits.

Find out how much invoice finance would cost your business using our calculator

Invoice finance calculator

What are the benefits of invoice financing?

There’s a host of benefits to be had from invoice financing, many of which are felt immediately as the invoice is sent off to the invoice finance provider.

1. Boosted cash flow

For a start, the entire process of invoice financing results in a boosting cash flow– having most of your invoice paid as soon as it’s raised means you can balance your finances more accurately and gives you the added peace of mind that a stable financial picture brings the table. It also saves you from having to cut costs and take loans to keep things afloat.

2. Funding coincides with growth 

Invoice financing is often a great idea for growing businesses or seasonal businesses, because the funding coincides with growth, meaning the bigger you get, the more access to better invoice funding options you’ll have.

3. Credit control

If you opt for the invoice factoring model, your provider will chase your buyers on your behalf. This can take a particularly irksome task of your hands, freeing up you to focus on the most important and far more interesting projects that you have lined up.

Want to learn more about how an invoice finance facility can boost your businesses cash flow? Get in touch

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