Invoice finance is a type of finance that allows SMEs and fast-growing businesses to get a cash advance on their unpaid invoices. This allows the company to focus on selling and increasing business, not worrying and chasing unpaid invoices.
There are around 45,000 businesses that use this type of finance every year in the UK and the size of the market has an estimated value of £17.9 billion per year.
Historically, this form of funding was available through banks and financial groups and generally offered to failing businesses. However, in recent years, it has become a lot more mainstream, being offered by Fintech companies and to small businesses looking to capitalise on a growth opportunity.
Invoicing finance or financing is popular with cash businesses and those that work on a contract basis. Businesses may receive a specific order and then need to buy the materials, staff and equipment in order to fulfil it. For this reason, it is typical for the loan term to last for 30, 60 or 90 days.
A common example is a catering company that has booked a big job to cater for an event or a wedding. With an invoice of £30,000 confirmed, they may need to purchase all the food and hire staff in order to carry out the order. With an invoice loan, they can receive up to 80% (and sometimes 90%) of the invoice total upfront, provided that it has been verified by the lender. (Source: Funding Invoice)
The caterer then gets a big injection of cash when the job is complete, allowing them to be in a better financial position and pay off their loan.
Other common industries where this is used includes:
The amount you can borrow from an invoice finance company is 80% to 90% of the invoice value and this could range from a few thousand pounds to millions.
Every company is assessed on an individual basis, taking things like repayment history into consideration. If you have a faced bankruptcy or the directors have a poor credit rating, this could impact their chances of approval or limit the amount they can borrow.
The fees for borrowing are typically 2 to 3% per month of the invoice value. The repayments are usually made once the business has completed their job or goal and has received a surge of income.
If the original invoice is not paid to the contractor, it is the borrower’s responsibility to follow up. If there is a prolonged period without any repayment, the main borrower is expected to clear the debt themselves.
Invoice finance broadly falls under two categories. Invoice discounting or trading is one approach where you use it for one-off invoices on a ‘pay-as-you-go’ basis and only for a couple of weeks at a time.
The alternative is invoice factoring where you hand over an entire ledger of invoices to the loan provider. This relationship is more likely to last for 12 months but will involve a more hands on approach as lenders may be more inclined to follow up on repayments on your behalf.