Invoice Finance: How does it work in the UK?

Monday 10th January 2022

Invoice Finance allows you to borrow money against the value of your unpaid invoices. It’s a simple and straightforward way to release cash that’s tied up in your sales ledger and many businesses use it to maintain positive cash flow.

In this article:

  • How invoice finance works
  • Who it is for
  • The different types of invoice finance

How does it work?

The specifics depend on the type of invoice finance you use, but most agreements in the UK work as follows:

  1. You carry out your normal business operations as usual, and invoice your client once goods (or services) have been delivered
  2. You forward a copy of your invoices to the lender that’s supplying your invoice finance
  3. They forward you a pre-arranged percentage of the invoice’s total value (normally 80-90%)
  4. You wait for the client to pay off their invoice (or allow the lender to collect the invoice for you)
  5. You settle the account with the finance provider, and pocket the remaining value of the invoice. Minus any fees

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

Invoice finance calculator

Who is it for?

Invoice finance is an ideal solution for SMEs that struggle with cash flow issues. It allows you to ensure that late payment of invoices never prevents you from paying wages, buying stock or expanding your business. Not to mention removing some of the pressure to chase late paying clients. Invoice finance is also a great fit for larger businesses that want to outsource their credit control operations and/or smooth over the inevitable hiccups that arise when clients are slow to settle their account(s).

What are the different types of invoice finance?

Here in the UK, there are two main types of invoice financing: invoice factoring, and invoice discounting.

1. Invoice Factoring

Under a normal invoice factoring agreement,

  • You issue all of your invoices, but your factor chases them on your behalf
  • When it is time to settle the invoice, your client pays the factor, and the factor forwards the balance to you.
  • All of your invoices are financed as and when they are issued - providing a constant flow of ready cash
  • You don’t need to employ or train staff to chase down unpaid invoices

Invoice factoring is better suited to smaller, less established businesses that can’t afford to waste time chasing unpaid invoices. In some ways, invoice factoring agreements are a bit like outsourcing your entire sales ledger. Your lender takes full responsibility for recovering the invoice, and you get to enjoy a steady stream of ready cash without worrying about credit control.

2. Invoice discounting

Invoice discounting is a little different . If you enter into an invoice discounting agreement,

  • You forward invoices as and when you receive them, but you still retain responsibility for chasing the invoice and repaying your factor once the debt has been recovered
  • You retain control over your sales ledger, and often get to choose which invoices you want to finance

Invoice discounting is ideal for larger (or more established) companies with their own credit control staff. It allows you to retain full control of client-side communications, and rarely impinges on your ability to conduct business as usual. Invoice Agreements don’t need to be disclosed to your clients either, which means that there’s no risk to your credibility. The only downside is that you’ll still have to chase all those unpaid invoices yourself, which can be time consuming and costly.

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

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