What is Invoice Financing (and What Are the Benefits)?

If the world was a perfect place, as soon as bills and invoices were produced people would pay up straight away, but in the real world this doesn’t happen always. In fact, it is a comparative rarity.

For today’s business, it is the norm to raise invoices with clients (loyal customers and first-timers) and to allow them several weeks or months to pay their debts. This kind of flexibility holds the key to keeping customers happy and is the very foundation of establishing good long-term relationships.

Unfortunately, this leaves many businesses (particularly smaller enterprises) in something of a bind. Until the invoices they raise are paid, they may encounter major issues with their own cash flow.

Chasing down loyal customers and forcing them to pay early is not a realistic option, but they need to come up with the money from somewhere to cover their own costs. A common conundrum and one that can be solved quite simply with invoice financing.

How Does Invoice Financing Work?

The principles of invoice financing are fairly straightforward. The facility works similarly to a secured loan, only without the use of physical assets as security.

Instead, the organisation’s outstanding invoices are used as security for the loan.

A brief overview of how invoice financing works in practice:

  1. Your business supplies a regular customer with a large order, and an invoice is issued in the normal way.
  2. You provide us with a copy of the invoice, and we will provide you with a cash advance of the value of the invoice (to an agreed % amount).
  3. You will likely receive this in is as little as 24 hours, though this is dependent on your bank. The funds can be used for any legal purpose for your business.
  4. When the customer pays their bill, the cash advance is repaid (plus all agreed borrowing costs and interest).
  5. The transaction is brought to a conclusion, and further cash advances can be requested based on subsequent outstanding invoices.

This provides smaller businesses in particular with a welcome lifeline, which may regularly find that they struggle with cash flow issues.

What Are the Benefits of Invoice Financing?

A study conducted in 2020 found that on average, a typical SME operating in the UK is chasing up five unpaid invoices at any one time: Amounting to £8,500 in outstanding debts. Where a smaller business operates with strictly limited on-hand capital, this is the kind of money that could make it impossible for them to function as normal.

Invoice financing comes particularly highly recommended to SMEs for the following reasons:

  • It provides almost immediate access to outstanding funds
  • The entire transaction is wrapped up within a few weeks or months
  • Qualification criteria for invoice financing are fairly relaxed
  • Interest rates and borrowing costs are lower than typical overdrafts
  • You can access up to 90% of the value of your unpaid invoices
  • It makes it much easier to maintain good customer relationships
  • Individuals and businesses with poor credit are welcome to apply

Ultimately it is the speed; simplicity and affordability of invoice financing that make it such a popular choice. For any business that encounters cash flow issues while chasing up unpaid debts, invoice financing comes highly recommended.

With invoice financing, you can get an advance depending on what the value of the outstanding invoice is.

By Craig Upton

Creating strategic partnerships and supporting data with extensive research in the latest trends Craig is well versed with most products within the financial sector. Craig has worked within the online marketing arena for many years, having worked with British brands such as FT.com, Global Banking Finance and UK Property Finance, specialising in bridging loans and specialist mortgage finance.

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