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Last updated: 18 February, 2021
It's a way to borrow money for your business, using the value of your unpaid invoices as collateral.
An invoice finance lender effectively buys an unpaid invoice from your business, paying you some of the money upfront and the rest when the invoice is paid by your customer.
In exchange the lender usually retains part of the invoice value. The pros and cons of invoice finance are:
Start by choosing the type of invoice funding that best suits your business.
This is a process of lending where the lender pays you the money on your invoice and you repay them once your invoice is paid to you by your customer.
This is the process where the lender buys your outstanding invoice from you and then collects payment from your customers itself using their own credit management team.
This is a combination of invoice finance and asset finance. This releases funds not only on your unpaid invoices, but also against any business assets such as property, stock or machinery.
Some invoice financing companies offer other specialist forms of invoice financing, including:
Export financing, for businesses that export overseas
Recruitment financing, for businesses that operate in the recruitment sector
Construction financing, for business in the construction sector
If your business trades in any of these areas or sectors, check if these types of working capital finance will better suit your needs.
When you enter into an invoice finance agreement, the lender will release a set percentage of the invoice value to you upfront - usually up to 85-90% of its value.
The rest is then released to you once it has been paid by your customer.
You can usually choose the upfront percentage, but it may cost you more to release a higher amount and the maximum percentage varies between lenders.
You have an outstanding invoice that totals £100,000.
You choose an invoice discount finance option that will release 90% of the invoice upfront and charges a 2% fee.
£90,000 is paid to your business once your finance application is approved, and another £8,000 once your customer pays the invoice. A £2,000 fee is retained by the lender.
Once you know which type of invoice finance is right for your business you need to look for the cheapest solution on the market.
There are usually two main costs to your business:
Fees for setting up your invoice finance arrangement with the lender
Interest charges on each invoice you finance.
Exactly how much your business will have to pay depends on lots of different factors, including your business turnover, credit record and the value of your business assets.
You can use this comparison to find invoice funding companies and visit their websites to check potential charges.
This depends on the type of invoice finance you choose. With invoice discounting you collect the money, with factoring you pay the lender to do it.
Yes, some lenders will consider your application if you have had credit issues in the past, but it may be more expensive.
Yes, in most cases your customers will know you are using a factoring company to collect the money owed to your business.
Most invoice factoring companies ask for at least 12 months of accounts when you apply, but some will accept less than this.
To be eligible to apply, you usually need to be the owner of the company or a registered company director.
P2P business loans can offer lower rates, but you cannot use your unpaid invoices as collateral when applying. You can compare P2P loans here.
Some lenders require you to have a business account with them to qualify for a business loan, but some may be more flexible so ask before you apply.
The London Interbank Offered Rate (LIBOR) is the reference rate businesses use to borrow money from each other. Some fees are based on the LIBOR.
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