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Invoice Finance

Invoice Finance for Small Businesses

If you find yourself waiting for weeks, or even months, for customers to pay their invoices, it can have a huge impact on your cashflow. If this sounds familiar, then invoice financing could be the answer.

What is invoice finance?

Invoice finance is a form of secured business finance where the amount you can raise is based on the value of your unpaid invoices. Depending on the provider and your own circumstances, you can generally access up to 90% of an invoice’s total value.

» COMPARE: Best business loans

What types of invoice finance are there?

The final step in the above process depends on the type of invoice finance you’ve taken out. Your options will generally be one of the following:

Invoice factoring

Invoice factoring, sometimes known as debt factoring, is when the provider buys the debt itself and makes a certain amount available up front – usually up to 90%. The provider then collects the debt themselves from the customer and pays you the remaining amount, minus interest charges and any related fees.

Invoice discounting

Invoice discounting is a little closer to a traditional loan, as the finance provider will loan you the money you’re owed from your invoices, and you repay this to the provider once your customers repay you. The responsibility for collecting the invoice payments stays with you, but you’ll still need to pay interest and potential fees on the amount.

» MORE: Types of business loan

How does invoice finance work?

While the exact way invoice financing will work depends on the type of product you take out, the usual process involves:

Raising an invoice to a customer.
Giving the invoice details to the finance provider.
Receiving a percentage of the invoice value, usually up to 90% .
If you’ve chosen invoice discounting, you will pay back this amount to the finance provider once you receive the invoice payment yourself.
If you have opted for invoice factoring, you will receive the rest of the invoice amount from the provider when they are paid by your customer.

What is selective invoice finance?

Selective invoice financing, sometimes known as spot factoring, is when you choose specific customers and invoices that you’ll borrow against. It means any other invoices you don’t finance will remain as before.

How much does invoice finance cost?

The cost of invoice finance is broken down into two parts: the interest on the loan, and any related fees you need to pay. Fees can depend on how quickly your customers pay up your invoices, so you might face extra charges if your customers pay late.

What fees are there with invoice finance?

Different invoice finance companies will have their own specific fees, but common charges for invoice finance include:

Service or management fees: The cost of using the facility and managing collections
Discount/finance fees: This refers to the cost of borrowing the money
Late payment charges: Only payable when your customers are late paying your invoices.

What are the pros and cons of invoice finance?

It’s useful to consider the advantages and disadvantages of taking out an invoice finance product:

Pros

Quick cash release can help with short-term cash flow issues.
Can be particularly useful for businesses with long client payment terms.
Invoice factoring reduces the pressure of chasing payments.
Some providers carry out credit checks on new customers and clients for you.
It doesn’t technically add to your existing debt as you’re already owed the funds.

Cons

You lose a small amount of money on fees and interest.
Invoice finance is usually only available for businesses that sell B2B, rather than to the general public.
Invoice factoring can affect your customer relationships as a third party will be chasing payment.
You may need to prove that your invoice collection process is reliable and that your current customers or clients have good credit.

What can I use invoice finance for?

Invoice financing is typically used for short-term cash flow issues and working capital, such as:

Paying staff
Buying materials or stock
Day-to-day operations
Maintaining cashflow while waiting for invoices to be paid

Is my business eligible for invoice finance?

In most cases, to be eligible for invoice finance your business must fulfil the following criteria:

You invoice other businesses
You have a high volume of invoices
Your invoices have no legal issues, are not being used as security elsewhere, and are for goods or services already provided.

Will I need a personal guarantee?

A personal guarantee might still be required, depending on your provider, your business profile and the product you’re taking out. However, some providers may rely on just the invoices themselves as the main security of the loan.

Can I get invoice finance with bad credit?

You may still qualify for invoice financing with poor credit – it’s likely that invoice finance providers will look more at your clients’ and customers’ credit than your business’s own credit rating.

What happens if my customers don’t pay their invoices?

If your customers don’t pay their invoices, it’s likely you’ll face extra fees and charges on your financing. If you’ve chosen invoice factoring, it means your provider will usually take responsibility for the debt, but it will still depend on the nature of your agreement:

A recourse agreement means you’re still ultimately responsible if your customer doesn’t pay, and you may have to buy back the invoice.
A non-recourse agreement means your provider will accept the loss.

Will my customers know I’m using invoice finance?

If you opt for invoice discounting then it’s unlikely your customers will know as it will still be your responsibility to collect payment. But with invoice factoring, your provider will collect on your behalf, so it’s quite possible that your customers will be aware that their debt has been sold to a third party.

It’s worth keeping this in mind if you think it may affect the relationship you have with your clients and customers.

How to get invoice finance through NerdWallet UK

In three short steps, we can help you find the best invoice finance options for your business – without affecting your credit score.

Tell us about your business: share a few details so we understand your needs.
See your matched lenders: view invoice finance companies from our panel of lenders that your business is most likely to qualify for.
Compare and apply: choose and apply directly with pre-filled details.

» COMPARE: Invoice finance

What are the alternatives to invoice finance for businesses?

There are a number of other business financing products you might want to consider.

Secured business loan

Secured business loans are a form of finance tied to an asset you offer as collateral. This security often means you can get access to lower interest rates and longer repayment periods as well as larger loan amounts. However, the asset you provide as collateral could then be at risk if you default on your payments.

Best for: Businesses that want better loan terms and have collateral to put up.

» COMPARE: Secured business loans

Unsecured business loan

The application process for an unsecured limited company loan is often quicker and easier as it doesn’t require you to use an asset as collateral. However, lenders may ask for a personal guarantee, making you responsible for repaying the loan if your business can’t.

Best for: Businesses that need funding fast and don’t want to use security for the loan.

» COMPARE: Unsecured business loans

Business credit cards

Business credit cards can help manage day-to-day expenses or help with short-term cash flow, and you may even be able to avoid paying interest if you clear your balance in full every month.

Best for: Everyday business expenses and managing short-term cash flow.

» COMPARE: Business credit cards

Short-term business loan

Short-term business loans often have high interest rates and short borrowing terms, useful for immediate business needs but generally costlier than standard loans.

Best for: Fixing short-term cash flow issues for your business.

» COMPARE: Short-term business loans

Asset financing

Asset financing allows businesses to spread the cost of business equipment, machinery or vehicles, rather than paying up front. In many cases the asset will act as security. You’ll usually be able to lease the equipment or agree to a hire purchase, depending on the provider.

Best for: Spreading the cost of equipment, machinery or vehicles.

Invoice finance is usually tied to the value of your unpaid invoices and the reputation of your customers, rather than your own credit history and score. They can also be a useful alternative to a secured loan that might require you to offer assets as collateral, as the invoices act as security.

Accounts receivable finance is another name for invoice finance, where you borrow against the value of your unpaid invoices.

It will vary by provider, but in some cases you could receive funding within 24 hours of your application being approved.

Yes, this is known as selective invoice funding, and allows you to submit the invoices you want to fund rather than handing your entire ledger over.

Invoice financing can be a good option for businesses with cash tied up in unpaid invoices if there’s a real cash-flow gap that needs to be filled. However, it can be expensive, so it’s worth weighing up your business model, industry and the urgency of your funding requirements before deciding.

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