Invoice finance: get paid on your invoices now, not in 60 days

Invoice finance lets your company draw most of the value of its unpaid invoices now, instead of waiting for customers to pay. The rest comes through, less the provider's fees, when the customer settles. It suits limited companies that sell to other businesses on credit terms, and because the funding rises as your invoices do, it scales with growth in a way a fixed loan can't.

How it works

The British Business Bank, in a guide written with UK Finance, explains that a business assigns some or all of its outstanding invoices to a provider and then has access to up to 80 or 90% of their value virtually immediately. The remaining 10 or 20%, less fees, is released when the customer pays.

As you raise new invoices, the pot of available funding refreshes. As customers pay, the advance is cleared. You draw what you need within that availability.

Worked example. The British Business Bank gives this one: if your business is owed £500,000 and the facility advances 80%, you could draw up to £400,000 straight away, with the remaining £100,000, less fees, available as customers pay.

Factoring vs invoice discounting

The British Business Bank notes that factoring is generally easier for smaller businesses to get and is usually available for businesses with annual sales up to £2 million, while invoice discounting is more often used by established businesses with larger turnovers.

Selective invoice finance lets you fund chosen customer accounts, and spot factoring funds individual invoices one at a time. They suit companies with occasional rather than ongoing gaps.

How the cost works

Invoice finance usually has two charges:

• A service fee, a percentage of the value of each invoice (or of turnover), covering the running of the facility.
• A discount charge, which works like interest on the money you've actually drawn, for as long as it's outstanding.

On top of those, look for set-up fees, minimum monthly fees, audit fees, charges for bad debt protection and fees on exit. A low headline discount rate can hide a high minimum fee if your volumes drop.

To compare an invoice finance offer with a loan, take a typical month: what you drew, for how long, and every fee you paid. Put the amount received, the total paid back and the period into the offer checker. It gives you a rough APR, which is the only fair basis for comparison with a business loan quoted at, say, 18%.

Sterling's take: on invoice finance, the fees you pay when nothing's happening matter as much as the rate when it's busy. Ask what a quiet month costs.

Who it suits

• Limited companies selling to other businesses on 30 to 90-day terms: wholesale, manufacturing, IT services, professional services.
• Growing companies where every new contract makes the cash gap bigger.
• Firms with strong, creditworthy customers. The provider's main interest is whether your customers will pay.

Who it doesn't suit

• Businesses that sell mainly to consumers or take payment at the point of sale. Look at a merchant cash advance or revolving credit facility.
• Companies whose customers routinely take longer than 90 days to pay. The British Business Bank notes some providers may decline in that case.
• Small turnovers, for a whole-ledger facility. The British Business Bank says a traditional facility generally isn't suitable below about £300,000 a year.
• Contracts with stage payments, retentions or heavy disputes, which make invoices harder to fund.

What funders look at

• Your debtor book. Who owes you, how much, how old the debts are, and how reliably those customers pay. This often matters more than your own short-term figures.
• Customer concentration. If one customer is most of your ledger, expect a lower advance or a cap on that customer.
• Companies House. Filed accounts, trading history, directors and existing charges. The invoices are the main security, and a provider may also take a debenture.
• Bank statements and your accounting records, especially if the facility will link to your software.
• CCJs against the company, and director history.
• Personal guarantees or indemnities. Directors may be asked for one. Ask exactly what it covers, for example whether it applies if an invoice turns out to be disputed.

Red flags

• Long minimum terms and notice periods you didn't notice. The British Business Bank notes providers require an agreement for a minimum period.
• Minimum fee clauses that bite if your sales fall.
• Recourse terms that make you repay quickly if a customer pays late, with no protection offered.
• Exit fees, or a debenture that's hard to release when you leave.
• A provider that isn't a member of an industry body. The guide notes that most providers are UK Finance members, which commits them to an independent standards framework with a code of conduct and complaints process; you can check the UK Finance member list.

Invoice finance vs the alternatives