Invoice finance has become an increasingly popular funding solution for businesses in the UK. With its ability to improve cash flow and support business growth, it’s no wonder that more and more companies are exploring this financial tool. Here, we delve into the top 5 most searched questions regarding invoice finance to provide you with a comprehensive understanding of this financing option.

What is Invoice Finance?

Invoice finance is a financial arrangement where businesses release capital from their outstanding invoices. This allows them to receive a significant portion of the invoice value immediately, rather than waiting for the customer to pay. There are two main types of invoice finance:

1. Invoice Factoring – Invoice factoring involves a business selling their invoice to the finance provider, who then takes on the responsibility of collecting payment from the customers. This option is suitable for businesses that prefer to outsource their credit control activities and those with a lower volume of monthly transactions.
   
2. Invoice Discounting – With invoice discounting, a business typically sends a copy of its sales ledger to the finance provider rather than each individual invoice. The finance provider would then lend against the total value of unpaid invoices. This facility is more suited to businesses with a turnover exceeding £750k or for companies raising a large quantity of invoices, thus invoice discounting tends to lead to less administration for both parties and the process can be further automated by a business granting read-only access to its sales ledger digitally via Sage, Xero etc.

How Does Invoice Finance Work?

Invoice finance typically follows a straightforward process:

1. Raise an Invoice: The business issues an invoice to the customer for goods or services provided.
   
2. Submit the Invoice: The business submits the invoice to the finance provider.
   
3. Receive Funds: The finance provider advances a percentage of the invoice value, usually between 70-100%.
   
4. Customer Payment: Your customer would pay into a trust account shared between you and the finance provider.
   
5. Balance Settlement: The finance provider receives the full payment into the trust account, and then rebates the remaining percentage of the loan back to yourself, taking off their fees.

What are the Benefits of Invoice Finance?

1. Improved Cash Flow: Invoice finance provides immediate access to funds tied up in unpaid invoices, which can be crucial for maintaining liquidity and meeting operational expenses.
   
2. Business Growth: With a steady cash flow, businesses can invest in growth opportunities, such as expanding operations, hiring staff, or purchasing inventory.
   
3. Credit Control Support: For businesses opting for invoice factoring, the finance provider manages credit control and collections, allowing the business to focus on core activities.
   
4. Flexible Financing: Invoice finance is more flexible than traditional loans as it grows with the business. The more invoices a business generates, the more funding it can access. (Up to the agreed facility limit)

How Much Does Invoice Finance Cost?

Invoice finance is suitable for business-to-business companies of all sizes and across various industries. However, it is particularly beneficial for:

1. Growing Businesses: Companies experiencing rapid growth often face cash flow challenges due to increased sales and delayed payments. Invoice finance provides the necessary funds to sustain growth.
   
2. Credit-Extended Businesses: Businesses offering extended payment terms to customers (30 – 120 days) can use invoice finance to bridge the gap between issuing an invoice and receiving payment.

Spot Invoicing vs. Full Book Invoice Finance

Spot invoicing offers several advantages:

• Flexibility: Businesses can select which invoices to finance based on their current cash flow needs.
  
  
• Control: Companies retain greater control over their finances and can avoid unnecessary fees by only financing specific invoices.
  
  
• Cost-Effective: Only paying fees on selected invoices can be more economical for businesses that do not require continuous funding.

Full book invoicing provides:

• Continuous Cash Flow: Ensures that businesses always have access to funds as new invoices are raised.
  
  
• Simplified Management: Automates the financing process, reducing administrative burdens and ensuring consistent funding.
  
  
• Predictability: Offers a steady and predictable cash flow, which can be crucial for strategic planning and growth.