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What is invoice finance?

It’s not uncommon for small businesses to experience some type of cashflow issue as they manoeuvre their way through those first few years of business, but you might not yet have explored invoice finance as a possible option.

Whether you have debts to pay, suppliers to settle invoices with, or you need cash to invest in your business to take it onto the next level, there are a number of reasons why cashflow can cause major problems for businesses, across a diverse range of sectors. But you don’t need to let it hold you back.

The good news is, there is a solution – SME invoice finance is a great way to free up much needed cash.

We’ve created a helpful guide outlining everything you need to know about an invoice finance facility.

If you’re looking for info on other types of business finance, check out our overview of your key funding options here. 

What is invoice finance?

Invoice finance is a term used to describe a flexible loan that is secured against your unpaid invoices, so that you can access the cash that you are owed. An invoice finance facility will advance you as much as 95% of the value of an unpaid invoice.

Once your client pays the balance owed, the invoice finance provider will then collect the balance from you. If you are considering this option, it’s important to be aware that the vast majority of invoice finance providers will charge a small fee when the balance has been collected.

Why do businesses choose to use invoice finance?

Whether you’re looking for funds to grow your business or you need to free up cash for equipment and other resources, utilising invoice finance is one of the most affordable and accessible ways to find funds quickly and easily. It can take away the headache of having to wait for invoice turnaround times, which can sometimes be as much as 90 days.

How does invoice finance work?

Invoice financing involves effectively selling your invoices to optimise your cashflow. It should be looked at like a cash advance scheme, with finance companies advancing the money that you are owed from your unpaid invoices.

As soon as your invoices have been paid, you will be expected to pay back the money to your lender. And of course, you have complete control when it comes to deciding which invoices you want to give to the finance company.

Types of invoice finance

There are two different types of invoice finance: invoice factoring and invoice discounting. It’s important that you understand the difference, so you can decide the best option for your business.

As businesses come in all different shapes and sizes, it isn’t a case of one size fits all when it comes to invoice financing. So, what is the difference between invoice factoring and invoice discounting?

What is invoice factoring?

Flexible and accessible, invoice factoring gives you complete control over the invoices you finance, and all fees are charged on an invoice by invoice basis. Once you have invoiced your client, you can then sell and assign the invoice to an invoice factoring provider. The bulk of the invoice will usually need to be factored. Once the invoice has been paid, the outstanding balance will then be sent to you, minus the fees.

Your invoice factoring provider will handle the full retrieval of all funds once the invoice is due, without you having to worry about dealing with your client.

What is invoice discounting?

Invoice discounting is similar to invoice factoring in the sense that you will still be able to access an advance on unpaid invoices. However, you will be responsible for collecting the debt from the client, rather than the lender taking care of this.

Many businesses choose this option if confidentiality is an issue, as they will not be required to reveal or disclose client details. It also means that your clients won’t need to know that you’re borrowing in this way.

What is the cost of invoice financing?

Fees for invoice factoring and discounting vary depending on the provider you choose however, as a general rule of thumb, you can expect to pay between 0.5% and 5% of the final invoice amount.

There are number of different factors that will impact on the cost of the invoice including the industry you work in, the size of the invoice, the value of the invoice, and the reliability of your clients.

What is export factoring?

Export factoring is another variation of invoice financing and is sometimes referred to as account receivable financing. Again, opting for export factoring can allow you to inject cash into your business as quickly as possible, when you need it, which is a great way to improve your cashflow.

If you choose this option, you should be aware that export factoring is actually based on the creditworthiness of the company’s customers and not the borrower’s own financials.

Finding invoice finance for your business

At Fluidly, we can take the hassle out of searching for the perfect SME invoice finance with our quick funding options tool.

Simply tell us your company name and we can match you with pre-qualified funding offers from a range of lenders, including invoice finance facilities in seconds.


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