What is invoice financing?

What is invoice financing? Put simply invoice financing is a way for businesses to borrow money against the amounts due on their invoices from customers.
What is invoice factoring blog image

What is invoice financing? It might sound confusing but put simply invoice financing is a way for businesses to borrow money against the amounts due on their invoices from customers. So, this is a great way to help improve your cash flow, pay employees or suppliers and reinvest vital finances to help grow your business.

Normally as a business you must wait until your customers have paid their balances in full, but by freeing up this cash you could really help take your business to the next level.

There are two main types of invoice finance you need to know about – these are invoice discounting and invoice factoring. As a finance broker Compare Your Funding sources both types.

What is invoice discounting?

Invoice discounting is the simplest form of invoice finance. This allows you to release cash from unpaid invoices as soon as they are raised. As with all types of invoice finance, through invoice discounting you sell your unpaid invoices to a lender and they give you a cash advance that is a percentage of the total invoice value. Effectively, you are leveraging the value of your sales ledger. Once the customer pays the invoice in full, the lender pays the remaining balance to you minus their fee.

Another way to look at invoice discounting is as a series of short-term business loans using invoices as security. The lender knows that you are owed the money, so they will lend you most of the invoice value before your customer has actually paid you. This type of invoice finance allows you to maintain your own customer relationships and remain in control of your sales ledger.

Compare Your Funding works with all major funders and can access the right facility for your business.

How does invoice discounting work?

  1. You sell goods or services to your customers as usual
  2. You then raise invoices for those goods or services and send them to your customers, and a copy to the funder
  3. The funder lends you the agreed percentage value of the raised invoices (typically 95% but can reach 100% in some cases) after verifying that the invoices are valid
  4. This frees up your cashflow so you can pay bills, repay debt, or use this money as part of a long-term plan for growth
  5. Once you have received payment from your customers, you repay the loan to the invoice discounting company, plus an agreed fee to cover costs, risk and interest. The fee is usually between 1% and 3% of the invoice total
  6. In some cases, your customers might pay into a trust account in your business name but that is actually controlled by the invoice discounting company. This reduces the risk of non-payment by you to the lender yet maintains confidentiality
  7. Sending out invoices immediately after work has completed is key to success with invoice discounting

To put an invoice discounting facility in place, Compare Your Funding will provide a free business funding review and help you source the best package, and complete all the paperwork to get you set up hassle free.

What is invoice factoring?

Having large amounts of cash tied up with your customers in unpaid invoices can significantly hinder your business growth. Invoice factoring is a great solution for unlocking the cash from your invoices. Typically, around 95% of the cash can be released to you instantly, in some cases even 100% of the funds are made available.

In a nutshell, invoice factoring is a way for your business to increase its cashflow by selling your invoices to a lender. This type of invoice finance is very similar to invoice discounting, however the fundamental difference is that your customers might know that you’re in receipt of invoice finance because you are using a lender – who typically manages your sales ledger and credit control processes. But this also means that the lender takes on the hassle of chasing late payments on your behalf.

Compare Your Funding sets up this type of facility quickly by searching the market for you and ensuring you only apply for funding our experts are confident you will be eligible for.

How does invoice factoring work?

Invoice factoring means selling control of your accounts receivable, either in part or in full.

  1. You provide goods or services to your customers in the normal way
  2. You invoice your customers for those goods or services
  3. You ‘sell’ the raised invoices to a factoring company. The factoring company pays you the bulk of the invoiced amount immediately
  4. Your customers pay the factoring company directly. The factoring company chases invoice payment if necessary
  5. The factoring company pays you the remaining invoice amount – minus their fee – once they have been paid in full

To get started take advantage of the free business review offered by Compare Your Funding.

Which industry is invoice finance suitable for?

Invoice finance is suitable for a wide range of industries. It offers the flexibility you want when you require a fast cash injection, need to react quickly to market changes, or it’s time to put your growth plans into action.  

Whatever industry you are in our experts can help find the right solution for your small or medium sized business.

Here are just some of the industries Compare Your Funding partners with on a daily basis.

  • Construction
  • Manufacturing
  • Catering
  • Printing
  • Logistics
  • Recruitment
  • Transport

Key takeaways for an SME looking for invoice finance

  • Invoice financing allows you and your business to use invoices as collateral for financing
  • Invoice financing can improve cashflow and even help speed up your growth and expansion plans – allowing you the flexibility that you need to succeed
  • With invoice discounting you remain in control of the sales ledger, collecting payment as normal and sending out reminders – so your customers are not aware that you that you have used this finance to boost your cashflow
  • With invoice factoring the factoring company takes on the responsibility for collecting the invoice payments meaning you don’t need to spend your time chasing unpaid invoices
  • Invoice finance is suitable for any industry and can help take your business to the next level

So, if you’re looking for fast cash, which grows with your business invoice finance could be for you.

Get in touch with our experts for a free business funding review today. The team at Compare Your Funding will walk you through the benefits of invoice discounting, invoice factoring or any of our other solutions to make sure we find the right solution for your business.