Business Loan vs Invoice Finance

Business loans and invoice finance can both put cash into a limited company, but they work in very different ways. A loan provides a set amount that you repay over an agreed term. Invoice finance releases cash tied up in unpaid invoices, and the funding available moves with your sales.

Choosing between them, or using both, starts with understanding what each is built to do. This guide compares their structure, repayment and typical uses.

How each is structured

A business loan is a fixed sum agreed at the outset. The finance provider assesses your business, agrees an amount and a term, and usually pays the funds in one go. Loans can be:

• unsecured, where no specific asset is pledged, although directors are often asked for personal guarantees
• secured, where the provider takes security over property or other business assets

The assessment typically centres on affordability: your trading history, filed accounts, cash flow and existing commitments. See how do business loans work for more detail.

Invoice finance is a revolving facility linked to your sales ledger. Rather than receiving a lump sum, you draw funding against eligible invoices as you raise them. The provider's main security is usually the invoices themselves, so its assessment focuses heavily on the customers you invoice and how well your invoicing is run.

Repayment and facility size

This is where the two products differ most.

Repayment. A loan is repaid through scheduled instalments over the term, whatever is happening in your sales. Invoice finance is repaid as your customers pay. There is no separate instalment in the usual sense, because the customer's payment clears the advance against that invoice.

Facility size. A loan amount is fixed when it is agreed. If your needs grow, you would usually have to apply for further funding. Invoice finance availability is linked to the value of your eligible invoices. As sales rise, the funding available can rise with them, up to the agreed facility limit. If sales fall, availability falls too.

Cost. Loans usually carry interest on the amount borrowed and sometimes arrangement fees. Invoice finance often combines a service charge with a charge on funds drawn. A direct comparison can be difficult, so look at the total cost for the way you expect to use each one.

Commitment. Loans run for a set term, and repaying early may involve charges. Invoice finance agreements can include minimum terms, notice periods and minimum fees. Read both sets of terms carefully.

When each may suit

A business loan may suit when:

• you need a known amount for a defined purpose
• you prefer fixed, predictable repayments you can budget around
• you sell mainly to consumers or are paid at the point of sale, so there are few invoices to fund against
• you want funding that does not depend on the size of your sales ledger

Invoice finance may suit when:

• you sell to other businesses on credit terms
• the main pressure is the gap between invoicing and being paid
• turnover is growing and you need funding that can grow with it
• you have creditworthy customers but limited other assets to offer as security

Neither is automatically cheaper or better. The right choice depends on the requirement, your customers and how your cash moves through the business.

Using both together

These products are not mutually exclusive. Some businesses use a loan for a specific project and invoice finance to support day-to-day working capital. A company taking on a large new contract, for instance, might use a loan for set-up costs and invoice finance to cover the gap while the new customer pays its invoices.

Combining facilities needs some care:

• Security can overlap. An invoice finance provider will usually want priority over your invoices. If an existing lender holds security over the business's assets, the providers may need to agree how that is arranged.
• Affordability. A loan provider will take into account your other commitments, including any invoice finance facility.
• Openness. Tell each provider about your existing borrowing and security. Full disclosure avoids problems later.

A commercial finance intermediary such as Emirex Finance can help you understand how the two might work alongside each other. The finance provider makes the lending decision in each case.

Key points

• A business loan is a fixed sum repaid in instalments over an agreed term.
• Invoice finance is a revolving facility, repaid as customers pay, with availability linked to your sales ledger.
• Loans often suit a defined requirement, while invoice finance often suits B2B cash flow gaps.
• The two can be used together, provided security and existing commitments are properly addressed.

This guide is general information, not financial, legal or tax advice. Finance is subject to status, eligibility and approval by the relevant finance provider. Emirex Finance works with UK limited companies only and is not authorised or regulated by the FCA.