Invoice finance explained for UK SMEs

What is invoice finance?

Invoice finance is a way for a business to raise funds against the invoices it has issued but not yet been paid. Rather than waiting for customers to pay, the business can draw on part of the value of those invoices sooner. When the customer pays, the funding is settled and the remaining balance, less the provider's charges, goes back to the business.

It is mainly used by businesses that sell to other businesses on credit terms. Because the funding is linked to sales, the amount available can rise as the business invoices more.

How does invoice finance work?

Every provider has its own process, but most arrangements follow a similar pattern:

1. You raise an invoice to your customer as normal, for work already delivered.
2. The invoice is shared with the provider, either individually or as part of your full sales ledger.
3. The provider releases funds against a proportion of the invoice value.
4. Your customer pays the invoice on their usual terms.
5. The balance is released to you once payment is received, after the provider's charges.

Behind this sits an agreement covering which invoices are included, how collections are handled and what happens if a customer does not pay.

Invoice factoring vs invoice discounting

The two main types of invoice finance are factoring and discounting. Both release funds against unpaid invoices. The main difference is who manages collecting the money.

Invoice factoring. The provider usually manages your sales ledger and collects payment from your customers. Your customers will normally know a finance provider is involved, as they pay the provider directly. Some businesses value having credit control handled for them.

Invoice discounting. The business keeps control of its own sales ledger and collects payment from customers itself. It is often arranged confidentially, so customers may not be aware of it. Providers generally expect the business to have reliable credit control and accounting processes in place.

Neither is better in every case. The right fit depends on the business, its customers and how it manages its accounts.

Other features you may come across

• Whole ledger or selective. Some arrangements cover all of your invoices, while others let you choose individual invoices or customers.
• Recourse or non-recourse. With recourse, the business remains responsible if a customer does not pay. Non-recourse arrangements include some protection against customer bad debt, usually at extra cost and subject to conditions.

Invoice finance for small businesses in the UK

Invoice finance can suit small and growing businesses, especially where cash flow is held back by long payment terms. Providers usually look at:

• who your customers are and how reliably they pay
• your invoicing and credit control process
• how much of your sales come from a small number of customers
• your sector and the type of work you invoice for
• any existing borrowing secured against the business

Having clear, up to date records of your sales ledger and customer payments can make the process more straightforward.

Things to consider before using invoice finance

Invoice finance can help cash flow, but it is worth weighing up a few points first:

• Cost. There are usually service charges as well as charges on the funds you draw. Understand the full cost before committing.
• Contract terms. Agreements can include minimum periods and notice terms. Check what is involved before signing.
• Customer relationships. With factoring, your customers deal with the provider over payment, so consider how that fits with how you work with them.
• Fit with other funding. Invoice finance supports working capital. For a property purchase or a short-term gap secured on property, a different route may fit better. Our guide to how bridging finance works explains one option.

Taking independent professional advice on your own circumstances is always sensible.

How Stocks Consultancy can help

Stocks Consultancy works with specialist lenders across bridging, commercial, asset and invoice finance, as well as business loans. We are not a lender and we do not give product advice. We help UK businesses understand their options and prepare the right information, so the conversation with lenders starts in the right place.

You can read more about the finance we cover on our specialist finance page.

Get in touch

If you are weighing up invoice finance for your business, use the form on our specialist finance page or email hayley@stocksconsultancy.co.uk. Include a short note on what you need and we will reply by email.