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Invoice finance can be used to access cash quickly while you wait for customers to pay you. Whether you need to pay suppliers or employees, or reinvest to grow your business, invoice financing can be a quick way to boost cash flow.
And depending on your payment terms, it might be 30 days (or sometimes up to 90 days) before a client pays you after you’ve issued the invoice.
Here’s how invoice financing can help your business manage cash flow.
Invoice financing allows you to sell your unpaid invoices to a third-party, who will then lend you up to 95 per cent of the value of those unpaid invoices up front.
It’s a short-term business finance option, plugging the gap between invoice payments and boosting your cash flow.
As an alternative to getting a business loan, it can be a quicker way to access cash. The money can sometimes be available within 24 hours.
But invoice financing isn’t without risk in the long-term, so you should think about whether it’s right for you and your business.
There are two types of invoice financing. Here’s an overview of invoice discounting vs factoring:
The lender will have control of chasing invoice payments and can credit check potential customers, giving you more time to focus on running your business. This does mean your customers will know you’re using a finance provider though, so make sure you’re happy with the lender’s approach.
Usually the lender will loan you 70 to 85 per cent of the invoice up front, and pay you the remaining amount (minus interest and fees) when the customer pays the invoice.
If you have an unpaid invoice for £200, you'll receive £140-£170 up front from the lender and then approximately £30-£60, minus any fees, once the invoice has been paid.
This is intended for businesses with higher turnover, offering them more control (but greater admin) as they’ll be responsible for chasing payment.
Here you can get an advance of up to 95 per cent of the invoice amount, with the rest paid (minus interest and fees) when the customer pays.
If you have an unpaid invoice for £500, you'll receive £475 up front and then the remaining £25, minus any fees, once the invoice has been paid.
Another option is to use ‘select invoice finance’ or ‘spot factoring’. This allows you to select which invoices and customers you want funding for, so you only use the lender when you need to.
Select invoice finance – choose which customers you want to finance (for example, if you have a client that regularly fails to pay invoices on time).
Spot factoring – choose which invoices you want funding for (for example, a large project with expensive materials, or invoices with longer payment terms).
Be aware that there’s usually a monthly cost associated with invoice financing. Other costs to look out for include:
Some of the advantages to using invoice finance include:
If you’re considering invoice finance for your business, make sure you’re aware of some of the drawbacks and long-term implications, too:
Business finance is complicated, so you should speak to a financial advisor or invoice finance broker if you’re unsure about anything.
Is there anything else you’d like to know about invoice finance? Let us know in the comments.
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Catriona Smith is a content and marketing professional with 12 years’ experience across the financial services, higher education, and insurance sectors. She’s also a trained NCTJ Gold Standard journalist. As a Senior Copywriter at Simply Business, Catriona has in-depth knowledge of small business concerns and specialises in tax, marketing, and business operations. Catriona lives in the seaside city of Brighton where she’s also a freelance yoga teacher.
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