How does invoice finance work?

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Our working example

£1200.00 Gross Sales Invoice (incl. 20% VAT)

30 day credit terms offered to your customer

Factoring company providing 85% advance against invoices

Your customer is late paying by 22 days

Factoring company charges at 2% (assumed)

Deliver goods / services

You deliver goods / services to the customer.

With Invoice Finance
Day
1
Cash in hand
£0.00
No Invoice Finance
Day
1
Cash in hand
£0.00

Raise and send invoice

You raise a sales invoice for £1,200.00 (incl. 20% VAT) and send it.

With Invoice Finance
Day
1
Cash in hand
£0.00
No Invoice Finance
Day
1
Cash in hand
£0.00

Sales invoice received and converted in to cash

£1,200.00 sales invoice is received by the invoice finance company, and they transform it into £1,020.00 cash and pay it into your bank account within 24 hours.

With Invoice Finance
Day
2
Cash in hand
£1,020.00
No Invoice Finance
Day
2
Cash in hand
£0.00

And now you wait!

Your customer has received the goods/service, and now you wait until they pay.

Fingers crossed they pay to terms.

With Invoice Finance
Day
2
Cash in hand
£1,020.00
No Invoice Finance
Day
2
Cash in hand
£0.00

It's day 40 and your customer has not paid!

Late paying customers are more managable with an invoice finance facility in place.

You have up to 120 days funding on each invoice.

With Invoice Finance
Day
40
Cash in hand
£1,020.00
No Invoice Finance
Day
40
Cash in hand
£0.00

It's day 40 and your customer has not paid!

One in three UK businesses experience late payments*, causing at best major cashflow challenges or at worst questioning the viability of the business

* Stats courtesy of FSB.org.uk 2022

With Invoice Finance
Day
40
Cash in hand
£1,020.00
No Invoice Finance
Day
40
Cash in hand
£0.00

...52 days later

Your customer has finally paid the invoice!

The factoring company takes back the 85% advance, and charges for the service. Paying the balance into your bank account.

With Invoice Finance
Day
52
Cash in hand
£1,176.00
No Invoice Finance
Day
52
Cash in hand
£1200.00

...52 days later

Your customer has finally paid the invoice!

You can now pay your suppliers/staff. How many times can this happen before suppliers put you on stop, or staff leave?

With Invoice Finance
Day
52
Cash in hand
£1,176.00
No Invoice Finance
Day
52
Cash in hand
£1200.00

Summing up - with invoice finance

With an invoice finance facility in place, you have benefitted from 98% of the money from the goods you delivered on day 2!

Dramatically improving cash-flow, enabling you to use that money to buy more goods, increasing your sales and furthering your business goals.

With Invoice Finance
Day
52
Cash in hand
£1,176.00
No Invoice Finance
Day
52
Cash in hand
£1,200.00

Summing up - without invoice finance

Waiting to be paid to terms can put stress on cash, let alone being paid 22 days late! Unable to move projects forward as fast, finding supplies for the next job, even finding payroll. There is a better way.

With Invoice Finance
Day
52
Cash in hand
£1,176.00
No Invoice Finance
Day
52
Cash in hand
£1,200.00

Day 1

Day 1

Day 2

Day 2

Day 40

Day 40

Day 52

Day 52

Summary

Summary

What is the difference between invoice finance and factoring?

Invoice Discounting

Factoring

Facility Size Available

From £10k to £50mn +

From £10k to £50mn +

Prepayment against invoices

Up to 95%

Up to 95%

How do you advise of new invoices?

Electronically and often in batched format. The facility provider will operate a running balance and wont run a mirror of your sales ledger or see the detail of each invoice

Electronically and each individual invoice. The facility provider will operate a mirror of your sales ledger. This allows them to perform credit control and send out monthly statements

Who performs credit control

You do

Factoring company / Can also be you

Will my customers know I’m financing this way?

No its a confidential facility

Yes

Most facility providers offer a disclosed facility (meaning a notice of assignment is placed on the hard copy of your invoices)

No

Some facility providers offer confidential factoring. This means that you perform the credit control and no notice is placed on your invoices

Sending of Monthly statements

You do

Factoring company

Who do my customer pay?

Your customers make payments to a trust account in your name. This is managed by the Invoice finance company

Your customers make payments direct to the Factoring company, They advise you when payments are received, so that you can update your sales ledger.

What checks will the factoring/invoice finance company make?

It’s standard practice for you to have a least one audit of your books, records and general procedures per year. This is performed by the Invoice finance company at your premises

Because the Factoring company is running a full detailed sales ledger, sending out monthly statements and chasing payments to terms. You should only get spot checks, often performed offsite remotely

What is invoice finance?

Invoice Finance is lending secured on the basis that a receivable (invoice) will eventually be paid by the debtor (customer). The lending normally takes the form of Factoring (disclosed to customer) or Invoice Discounting (undisclosed to customer), but now has many variants.

For B2B businesses the sales ledger is often the biggest asset and therefore the easiest to borrow against. Borrowing against invoices is usually the easiest and most flexible way to borrow. The number of suppliers of this kind of facility means pricing is driven down by competition.

There are suitable facilities for businesses from start-ups to multi-nationals. The industry serves around 50,000 clients who now borrow over £16 billion at any one time..

Who can use invoice finance?

Facilities are available for businesses from start-ups to multi-nationals. The only determining factor is a requirement that the client is selling to other businesses on normal credit terms (generally less than 90 days). The quality of the receivable is more important than strength of the user. It is ideal for companies set on a solid growth path who need a form of finance that will grow with them.