Invoice finance for startups [simple guide]

Wednesday 24th May 2023

Funding is one of the primary concerns for any start-up business - whether it’s the initial injection of capital that gets you going, or that line of credit that keeps you afloat as you establish yourself as a profitable growing business. We’re pleased to say that we’ve seen many start-ups achieve success on this front by choosing invoice finance.

Cash flow can often be quite difficult to maintain when you’re just starting out, but unfortunately, without liquidity, you’ll make little progress. You might need to bring on new employees, purchase new stock and equipment, or rent premises. It all costs money, and chances are that any hindrance to sales or quick payment of invoices will severely hamper your liquidity.

It’s for this reason that many start-ups will pursue a variety of funding options to cover the gaps in income, and there are lots of them available. Bank loans and overdrafts are the traditional method, but in the modern age, crowdfunding and online fundraising campaigns are becoming increasingly common. However, invoice finance has proved to be a successful option for a lot of start-ups - it’s different to the previously mentioned options, but it has a lot of benefits from those new businesses who are already making sales, but don’t have the luxury of being able to wait for invoices to clear.

In this article:

  • How invoice financing works
  • Invoice Factoring
  • Invoice Discounting

So how does it work?

The process is actually fairly straightforward, and is not nearly as complex as many initially believe:

  • Once the agreement is in place, you carry out business as usual, but whenever you raise an invoice, it’s also raised with the invoice finance provider too.
  • They’ll immediately pay you a proportion (in our case it’s up to 85%) of the value of the invoice for you to use as you see fit, whether it’s for wages, stock or investment into growing your business.
  • Once the invoice is settled by your customer, the remainder of the balance is transferred to you, minus a small fee for the finance facility. And that’s it.

One of the major benefits with this system is that you don’t need to worry about increasing overdrafts or taking out new loans as your new business grows and requires more flexibility. With invoice finance, your limits are simply scaled alongside turnover, so as your start-up becomes a small or medium sized business, your funding solution is there to support you.

Now, there are actually a couple of different types of invoice finance, and the one you choose will depend on your circumstances (it’s never a bad idea to consult an advisor before you make a decision or simply pick up the phone and give us a call).

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

Invoice finance calculator

Invoice Factoring

Invoice Factoring is perhaps the most attractive option to start-ups. This is because collections are handled by the finance provider. We’ve found in the past that many of the smaller businesses we’ve worked with, and start-ups in particular, have found that they like the fact that they don’t have to worry about collecting unpaid invoices from clients.

How it works:

  • You supply goods and services to your customers.
  • You send your customer the invoice made payable to the invoice finance provider and send them a copy.
  • You will then receive up to 90% of the invoice amount. At this stage, a service fee is deducted from your account as a percentage of your turnover.
  • The customer settles the invoice in full by making their payment direct to the invoice finance provider. When the remaining balance is paid, a small finance fee is deducted from your account, charged as a percentage of the amount lent
  • This invoice clears and you recieve the remaining 10% balance minus the finance fee.

Invoice Discounting

If you’d prefer to deal with everything yourself, Invoice Discounting offers a very similar service, but you’ll be responsible for collections, and your use of an invoice finance product will be kept completely confidential from your customers.

How it works:

  • You supply goods and services to your customers.
  • You send your customers invoices and send the invoice finance provider copies of the invoices in bulk
  • You will receive up to 90% of the invoice amount. At this stage, a service fee is applied to the invoice value.
  • The invoices clear and you receive the remaining 10% balance minus the service fee costs.

To see how this has worked for start-ups and small businesses in the past, take a look at our case studies section, which details some of the companies we’ve helped. For example, a London recruitment agency were able to grow their company from just two members of staff to more than a 130, helped in no small part by the flexibility that our invoice finance products offer. As soon as they were able to place candidates and raise invoices, they had the cash ready to be used to pay wages and expand.

If you’re planning a start-up, or have just recently started trading, and want the security of good cash flow, then invoice finance is something you should certainly consider.

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

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