Invoice Finance

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Invoice finance is a financial service where a business sells its outstanding invoices (accounts receivable) to a lender in exchange for immediate cash. It helps businesses maintain a steady cash flow while waiting for customers to pay their invoices, which might take 30, 60, or even 90 days. By using invoice finance, companies can cover their operational expenses, invest in growth, or manage unexpected costs without waiting for invoice payments to come in.

There are two main types of invoice finance: Invoice Factoring and Invoice Discounting.

Invoice Factoring: In this arrangement, the lender (called the factor) buys the business’s invoices and advances a percentage of the total invoice value, typically around 70-90%. The factor then takes over the responsibility of collecting the debt from the customer. Once the customer pays the invoice in full, the lender releases the remaining balance to the business, minus a fee.

For example, if a business has an invoice for £10,000, the lender can advance up to 90%, immediately. Once the customer pays the full invoice, the lender sends the remaining balance, after deducting fees, which start from as little as 0.1%. This service is usually disclosed.

Invoice Discounting: Similar to factoring, but the business remains responsible for collecting the payment from the customer. The lender still provides an advance on the invoice, but the customer is unaware that the business is using a third party for finance. Once the invoice is paid, the business repays the lender along with their agreed fees. 

Rates and Fees: 

The cost of invoice financing depends on factors like the size of the invoices, the industry, the creditworthiness of the business and its customers, and the length of the payment terms. Typical rates include:

Service Fee / Admin Fee: The cost the lender applies to all transactions put through the facility.

Discount fee: A percentage added to the bank of England interest rate, divided over a daily period.