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Invoice finance is a financial arrangement that allows businesses to access cash tied up in their outstanding invoices.
This type of financing can help improve cash flow, enabling businesses to meet their immediate financial obligations and operational needs without waiting for customers to pay their invoices.
What are the Different Types of Invoice Finance?
Invoice factoring is a type of invoice finance where the lender takes ownership of the invoices and manages credit control. This means that the lender will collect payments from the customer and handle any disputes or bad debts. Factoring companies typically offer a range of services, including credit checking, debt collection, and accounts receivable management. This type of invoice finance is often used by businesses that have a high volume of invoices and limited resources to manage their accounts receivable.
Invoice discounting, on the other hand, allows the business to retain ownership of the invoices and manage credit control themselves. The lender provides an advance on the outstanding invoices, typically ranging from 70% to 90% of the invoice value. The business is responsible for collecting payments from their customers and managing any disputes or bad debts. Invoice discounting is often used by businesses that have a good credit history and want to maintain control over their accounts receivable.
Selective invoice finance is a one-time funding solution that allows businesses to release cash tied up in individual invoices. This type of financing is often used by businesses that have a large or complex accounts receivable portfolio and need to release cash quickly. Selective invoice finance can be used to fund specific projects or meet unexpected cash flow requirements.
Invoice finance is a type of financial solution that helps businesses to release the cash tied up in their outstanding invoices. Here’s a step-by-step explanation of how it works:
The business provides goods or services to another business (B2B) and sends an invoice for payment.
The invoice is typically issued on the business’s letterhead and includes details such as the amount owed, payment terms, and contact information.
The business applies for invoice finance by submitting their invoices to the lender. The lender will review the invoices to determine their value and creditworthiness.
The lender purchases the invoice from the business at a discounted rate, typically between 1% to 5% of the invoice value. This discount is deducted from the total value of the invoice. For example, if the invoice is worth £10,000, the lender might pay £9,500 for it (90% of the value).
The lender provides an advance to the business, usually up to 95% of the invoice value minus the discount. In our example above, the business would receive an advance of £9,350 (95% of £9,500).
The business waits for the customer to pay the invoice. The customer can pay the full amount owed, or make partial payments. The business can continue to provide goods or services while waiting for payment.
When the customer pays the invoice in full, the lender is repaid. Any remaining balance (the difference between the advance paid and the amount owed) is returned to the business.
If the customer defaults on payment, the lender assumes the risk of bad debt. In this case, the business may need to negotiate with the customer or take legal action to recover the outstanding amount.
Invoice finance rates vary depending on the lender, industry, and creditworthiness of the business. Typically, invoice finance rates range from 1% to 5% of the invoice value. For example, if an invoice is worth £10,000, the rate might be 3%: £300 discount (invoice value minus discount), or 4%: £400 discount, or 5%: £500 discount.
In addition to the discount rate, invoice finance providers may charge additional fees. These fees can include a factor fee, which is a fixed fee charged by the lender for their services, typically ranging from 0.5% to 2% of the invoice value. For instance, an invoice finance provider might charge a factor fee of 1.5% of the invoice value (£150 on a £10,000 invoice).
Other fees may include an administration fee, which is a fee for the lender’s administrative costs, usually around £20-£50 per month. Some providers may also charge a minimum fee, regardless of the amount advanced. In this case, the minimum fee might be £25 per month.
If the customer defaults on payment and the lender assumes the risk, the provider may charge a bad debt fee. This fee would be 20% of the outstanding amount (£2,000 on a £10,000 invoice).
Other costs to consider when choosing an invoice finance provider include transaction fees for each individual transaction or batch of transactions, interest rates charged on outstanding advances or delayed payments, and late payment fees for delayed settlement.
When selecting an invoice finance provider, it’s essential to carefully review their pricing structure and fees to ensure they align with your business needs and cash flow requirements. Be sure to ask about any additional costs or fees associated with their services.
To qualify for invoice finance, a business must meet certain criteria, including:
Disclaimer: Lender Portal is a credit broker that connects UK businesses with a range of lenders. We work closely with businesses and their trusted advisors to provide access to business finance solutions. While we do not provide loans or other financial products ourselves, we can introduce you to a selection of providers that may be suitable for your needs. We may receive commission from the lenders we introduce you to, should you proceed with an application, and applicants must be at least 18 years old and meet specific terms and conditions to be eligible for our services. Guarantees and indemnities may be required by some lenders as part of their lending criteria. Lender Portal is registered with Companies House (Company Number: 15871826) and is based at 71-75 Shelton Street, Covent Garden, London WC2H 9JQ. By using our services, you acknowledge that you have read and understood these terms and conditions, and agree to be bound by them. ICO number: ZB727660
