Invoice Finance Explained

Many businesses that sell to other businesses do not get paid when the work is done. They deliver, raise an invoice and then wait for the customer's payment terms to run. During that wait, wages, suppliers and overheads still need paying.

Invoice finance is a way of using that unpaid sales ledger to access cash earlier. Instead of borrowing a fixed sum, the business draws funding against invoices it has already issued. This guide explains how it works, who it can suit and what finance providers usually consider.

How invoice finance works

Under an invoice finance arrangement, a finance provider advances part of the value of eligible unpaid invoices. When the customer pays, the provider releases the remaining balance, less its charges.

A typical cycle looks like this:

1. You complete the work or deliver the goods. The customer accepts it and you raise an invoice on your normal terms.
2. You submit the invoice to the provider. This may be individual invoices or regular updates of your whole sales ledger.
3. The provider makes an advance. It funds a proportion of the invoice value, which varies by provider and the quality of your customers.
4. Your customer pays. Payment usually goes to an account the provider controls or has rights over.
5. The balance is released. Once the invoice is settled, the provider pays you the remainder, minus its fees.

Charges often combine a service fee with a charge on funds drawn. The structure varies by provider, so compare the full cost rather than a single headline figure.

Because funding is tied to invoices, the amount available tends to rise as sales grow and fall if sales slow. That makes it a common form of working capital finance.

Who it can suit

Invoice finance is built for business-to-business trade on credit terms. It can suit companies that:

• invoice other businesses rather than consumers
• offer payment terms and regularly wait to be paid
• are growing and need cash to keep pace with new orders
• have seasonal peaks where costs land well before customer receipts

It is used across many industries, including recruitment, wholesale, manufacturing, transport and business services. Businesses that are paid at the point of sale, or that sell mainly to consumers, usually have little or nothing to fund in this way.

What providers usually look at

The provider is relying on your customers paying, so it often looks at your sales ledger as closely as your own business. Factors can include:

• B2B invoices. Invoices must generally be to commercial customers, for goods or services already delivered.
• Customer quality. The creditworthiness and payment record of the businesses you invoice.
• Spread of customers. Heavy reliance on one or two customers can limit how much a provider will fund against them.
• Clean invoicing. Clear contracts, proof of delivery or completion, and few disputes or credit notes.
• Billing structure. Invoices raised in advance, stage payments, retentions, or customers who are also your suppliers can be harder to fund.
• Your business. Trading history, management information, existing borrowing and any security already in place. Directors may be asked for a personal guarantee or indemnity.

The main forms

There are three main forms, and providers combine features in different ways.

• Invoice factoring. The provider advances funds against your invoices and usually manages credit control and collections. Your customers typically know a third party is involved, because they pay the provider.
• Invoice discounting. You keep control of collections and the customer relationship. It is often confidential, and providers generally expect stronger credit control and financial reporting.
• Selective or single invoice finance. Rather than funding the whole sales ledger, you choose specific invoices or customers to fund. This can suit occasional needs, although terms and costs vary.

Some facilities can also include protection against customer bad debts, known as non-recourse, while others leave that risk with the business. The differences between the first two forms are covered in invoice factoring vs invoice discounting, and our invoice finance page sets out how the product can support cash flow.

A commercial finance intermediary such as Emirex Finance can help you understand which form, if any, fits how your business invoices and collects. The finance provider makes the final decision.

Key points

• Invoice finance releases cash tied up in eligible unpaid B2B invoices, rather than lending a fixed sum.
• The provider advances part of each invoice and releases the balance, less charges, when the customer pays.
• Providers look closely at your customers, your invoicing and your sales ledger, as well as your business.
• The main forms are factoring, discounting and selective invoice finance, and terms vary between providers.

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.