Invoice Finance Explained: Everything a Business Needs to Know!

Running a small business is challenging. There are many things to think about – marketing, product development, sales, bookkeeping, and the list goes on! One thing that many small businesses really struggle with is cash flow. This can be a major roadblock to growth and success. One solution for improving cash flow is invoice finance. Invoice finance is a type of funding that can help small businesses bridge the gap between their outstanding invoices and getting paid.

Invoice finance enables businesses to get paid immediately for the invoices they issue. This can be a lifesaver for businesses that need to keep their cash flow positive to stay afloat and grow.

In this blog post, we will discuss all aspects of invoice finance and answer some frequent questions about it. We will also provide information on how invoice finance can benefit small businesses specifically.

What is Invoice Finance?

Through invoice finance, a company sells its accounts receivable to improve its working capital and perhaps the easiest way to think of it, is as a lending facility given against the value of unpaid invoices. It’s a way for businesses to borrow money against these amounts due from customers and in doing so it helps businesses pay employees and suppliers, improve cash flow, and invest in operations and growth earlier than if they had to wait until their customers paid their balances in full. This provides a business with more financial flexibility than most other types of borrowing giving access to money when needed most!

With an invoice finance advance being primarily secured on the outstanding sales ledger, businesses can obtain significant funding lines that wouldn’t normally be available. With this funding in place, businesses can often negotiate favourable payment terms with their customers and take on new contracts with larger clients and suppliers, without worrying about cash flow issues.

There are three distinct types of Invoice Finance available:

  • Recourse Factoring
  • Disclosed Invoice Discounting

Recourse Invoice Factoring

This is an expertly managed funding solution covering all aspects of your sales ledger management, from the moment of the initial sales transaction to the point when the debt is paid. Generally, there is also an online system that allows you remote access to your ledger and control account, enabling you to remain fully appraised of your position at all times.

Contrary to widespread belief, factoring is not just about how much prepayment can be drawn, but critically the quality of service rendered. Reliable and efficient management of your ledger will naturally create strong cash flow. An accredited funder will ensure diligence when determining the correct identity of the debtor and corresponding with them on a timely basis. The funder maintains constant contact and a good rapport with your customer, ensuring prompt payment of debt.

Disclosed Invoice Discounting

This solution allows you to retain control of your ledger management whilst receiving the benefit of prepayment against your debts. At Partnership Invoice Finance we operate this slightly different to most other providers preferring to run a shadow ledger facility which allows more flexibility in funding and removes the need for monthly reconciliation.
Allocation of cash as and when received removes the common problem of having to wait for the adjustments within the month-end reconciliation being applied.
Invoices you send will be required to include a notice of assignment confirming the funder’s involvement, and monthly statements are sent to the debtors to update them on the position owing. You will need to demonstrate good credit management procedures to qualify for this facility.

Factoring or Invoice Discounting, which is best for me?

It can be hard enough for small businesses to keep up with invoices, let alone knowing which type of financial services to choose to help keep you ahead. If you are considering factoring or invoice discounting, it’s worth looking at the difference between each product.

For both factoring and discounting, the result is the same; a cash injection into your business to boost working capital and establish a healthy and stable cash flow. Invoice finance is a financial solution for many small businesses selling goods or services to other businesses but is not suitable in all cases, particularly where sales are of a contractual nature or involve stage payments or sell and return.

Factoring and discounting are both ways for businesses to receive money, but they differ in who collects in the outstanding sales ledger. Factoring means that the funder will be responsible for all aspects of credit control including collecting payments from customers, raising monthly statements, making chasing phone calls, sending collection letters, etc. This is a fully serviced outsourced provision.

With invoice discounting, the business manages its own sales ledger and collects payments as normal from the client. This is then generally paid into an account held jointly by the funder and the business. This service tends to be used by larger businesses with established in house credit control teams.

Key differences between factoring and invoice discounting:

FactoringInvoice Discounting
Generally used for small to medium-sized businesses, with a turnover under £1m. Though substantial companies also use and benefit from the outsourced service.Used mainly by medium to large businesses, with turnover over £1m and smaller companies with established credit control procedures.
The invoice factoring company has control over the collection of the sales ledger.The business requesting finance has full control over the sales ledger collection.
Factor collects payments and chases customers on behalf of the business and therefore facility is fully disclosed (a few providers will also offer this on a confidential basis).Can be either confidential (customers do not need to know that an invoice discounting facility is present) or disclosed.
Can be more expensive than Invoice Discounting as it includes an additional service, though often at a price cheaper than trying to do it in-house.Generally, less expensive than full factoring and priced, in part, in line with perceived risk in the advance.
Credit control and collection services allow the business to free up time and focus on sales and internal improvements as required.Discounting facilities can fit and work alongside accounts payable, finance and accounting teams within the company.
The ledger can be insured.The ledger can be insured.

In short, invoice finance is a flexible funding solution for businesses that need to level out cash flow during times of growth or to fund innovation. It’s reliable, grows as you grow, and is extremely affordable with many options available to suit your business needs.

The benefits of invoice finance

  • Businesses can release around 80-90% of the value of invoices straight away and receive the balance (less fees) when their customer pays.
  • Other assets are not needed to access invoice finance.
  • Invoice finance can be used even if you’ve been previously rejected from the bank, might not be considered creditworthy, or have only recently started trading.
  • Competitive pricing.
  • Helps you bridge the gap between invoicing the end customers and receiving the final payment.
  • Helps manage peaks and troughs in cash flow as your business grows.
  • Invoice finance is a viable low-cost finance solution for growing businesses

Contact us today to start stabilising your business’ cash flow or if have any further questions.