Compare Invoice Finance for Businesses

What is invoice financing?

Invoice financing allows businesses to access money against the value of outstanding customer invoices — which means they can access funds immediately, rather than waiting for their customers to pay the invoices.

An alternative to traditional bank lending, invoice financing is a type of loan that can help businesses boost their cash flow and cover expenses while waiting for customers to pay their invoices.

Invoice factoring vs discounting

There are two types of invoice financing available to businesses: factoring and discounting.

• Invoice factoring: Involves selling invoices to a lender. The lender is then responsible for collecting payments for those invoices.
• Invoice discounting: Involves using invoices as collateral for a loan. Responsibility for collections can either remain with the business (known as an undisclosed agreement), or can be managed by the lender (known as a disclosed agreement).

How does invoice financing work?

Here’s a quick guide to help you understand the differences between invoice factoring and invoice discounting:

Invoice Factoring:

1. Your business sells its unpaid invoices to a third-party factoring company.
2. The factoring company pays you an upfront amount (usually around 80%) of the invoice value, minus their fee.
3. The factoring company then collects payment from the customers directly.
4. Once the payment is received, the factoring company pays you the remaining amount, minus any additional fees.

Invoice Discounting:

1. Your business uses its unpaid invoices as collateral to obtain a loan from a lender.
2. The lender pays you a percentage of the invoice value (usually around 80%) minus their fee.
3. You remain responsible for collecting payment from your customers (or the lender can if you choose a disclosed arrangement).
4. Once payment is received from your customers, the finance is repaid, plus any interest and fees.

What type of businesses can benefit from invoice financing?

Small and medium-sized businesses that don’t have a long trading history or a high credit rating could benefit from invoice financing. The lender will check out your customers’ ability to pay rather than focusing on your credit score.

This funding option helps bridge the cash flow gap between payments and is a quick way to manage working capital.

Pros and cons to consider

Consider these key points when deciding if this form of financing is right for your business:

Pros:

• Eliminate cash flow stress: Provides a fast and convenient solution for businesses that face long payment cycles to secure cash flow.
• Fast processing: Typically, approval and funding can be completed within a few days, allowing businesses to meet their financial obligations quickly.
• No property security needed:This makes it a desirable option for small businesses with limited assets to secure traditional loans — it also means your family home can remain safe!

Cons:

• Relatively high fees:Particularly for businesses with a high volume of invoices or customers with a low credit rating. These higher fees can reduce your profit margin and eat into your bottom line.
• Non-payment risk:It is still possible your customer might not be able to settle the invoice on time. This can expose you to potential financial penalties for delayed payments with the lender.
• Risk the customer relationship:Invoice financing can potentially harm customer relationships if the lender assumes responsibility for collections, leading to confusion and concerns about financial information access. Using an undisclosed arrangement keeps the management of collections within your business and helps maintain customer relationships.

Invoice Financing Summary

1. If you’re a small to medium-sized business in a cash flow crunch, invoice financing is worth considering.
2. Consider if you will seek invoice factoring or invoice discounting.
3. Shop around until you find a provider whose terms match the cashflow problems you’re having.
4. To find the best option for your business, always compare fees, research various providers and read customer reviews.