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Business Finance Series – What is Invoice Finance? – Part 1

There are numerous ways that you can fund your business and over the next few weeks, I want to take a detailed look at one of them: Invoice Finance.

If as a business owner you are considering invoice finance, then there are some key questions you will need answered:

  • What is invoice finance?
  • How does it work?
  • What are the options?
  • What are the “pros and cons”?

Let’s start by asking the question, what is invoice finance?

Historically, invoice finance has had a bad rap. Twenty years or so ago, ‘factoring’ as it was commonly known, was viewed as a type of funding that was used by businesses “as a last resort”, usually because they had cash flow problems and were generally viewed to be in financial difficulty.

Part of the issue was that factoring was not confidential. In other words, the lender or factoring company took over the credit control function for the business meaning the lender would have direct contact with the customers of that business.

The result was the customers knew immediately that their invoice was being “factored”, and rightly or wrongly, assumed the business in question must be in financial difficulty.

This of course, created the potential for reputational damage, which much of the time was both unfair and incorrect. Nevertheless, there was a time when a stigma was attached to using factoring to finance your business.

That was in the “bad old days” and since then much has changed.

Invoice finance is now very much mainstream, and an increasingly popular and effective source of business finance for many business owners.

The purpose of the next few weeks blogs, therefore, is to look in more detail at invoice finance and how it can help you fund your business.

So, with that in mind, what exactly is invoice finance, what options exist and when is it a good idea for a business to use invoice finance as a funding option?

Let’s start by explaining what invoice finance is and how it works.

What is Invoice Finance?
Invoice finance is a collective term for the various types of invoice-based lending that are available to businesses such as factoring, spot factoring, invoice discounting and selective invoice discounting.

Invoice finance utilises the debtors or accounts receivable within a business. In other words, you have provided goods or services to your customer and raised an invoice that is now due for payment. This is known as a debtor or account receivable within the business.

Invoice finance is a way for a business to in effect, unlock or release cash that is tied up in outstanding invoices where payment is awaited. This is done by “selling” the invoice to a third party – the lender – who will advance an agreed level of funds as a percentage against the value of the invoice that is due for payment.

As a result, instead of having to wait for your customers to pay your invoice, you borrow the money against the value of the invoice, meaning funds are available to immediately inject into your business.

Or, to put it another way, invoice finance is the process of a lender advancing you funds that are due on an outstanding invoice, without you having to wait for that invoice to be paid.

For instance, your normal payment terms for a customer to whom you supply goods or services may be 30 days. However, you regularly find that you must wait 45 days, 60 days or even longer for your customers to pay their invoices.

This can have a massive and potentially unsustainable impact on the cash flow of your business and therefore dramatically affect your ability to trade.

Using invoice finance as a means of funding your business, overcomes the issue of having to wait weeks or even months to receive payment for the goods and services you’ve supplied.

Instead, put simply, you provide the lender with the outstanding invoice and they advance funds up to a pre-arranged percentage of the invoice value.

Not only does this solve a potential cash flow issue, but it also means you and/or your team can get on with running the business rather than expending time and energy chasing payment of invoices.

There is also the more subjective matter of your emotional stress being reduced because now you have a funding solution that helps to overcome the day-to-day cash flow problems that you may otherwise face.

These are real issues, and in working with clients, I regularly come across “stressed out” business owners who are experiencing serious cash flow issues simply because their invoices are not being paid on time.

I recently came across some research carried out in late 2018 by the accounting software provider Xero.

They carried out a study of two million invoices, and their research discovered that on any given day, the average small business owner in the UK is owed £24,841 in late payments.

Imagine for a moment, as a small business owner, what you could do if you had an extra £25,000 in your bank account?

Employ extra staff, embark on a new marketing campaign, install a new IT system. Or perhaps on a more personal note, take out a dividend and pay down the mortgage, carry out some home improvements or take the family on the holiday of a lifetime!

It is estimated that approximately 50,000 small business close every year in the UK because of cash flow problems and the late payment of invoices is certainly a contributory factor.

To solve this cash flow issue, I believe small business owners have the opportunity “to take matters into their own hands”.

This can take several forms, including improved systems for monitoring credit control, as well as ensuring credit control and the chasing of unpaid invoices becomes a key operational aspect of the business.

But one other way to improve cash flow and overcome the issue of late payment of invoices, is by ensuring the implementation of an effective funding solution within the business.

Namely, invoice finance.

And over the next few weeks, I’m going to look in more detail at how invoice finance could work for your business.

In the meantime, if you are currently experiencing cash flow problems within your business and want to talk to an expert, then email us at or give us a call on 020 8949 2122 and let’s see how we can help.