Invoice finance
What is invoice finance?
Invoice finance is a funding solution that allows you to release cash tied up in unpaid invoices. Invoices are often an untapped asset in your business. So, instead of waiting 30, 60 or even 90 days for customers to pay, a lender will advance you a large percentage of the invoice value upfront. The remaining balance, minus fees, is paid once your customer settles the invoice.
For many businesses, cashflow pressure is not caused by lack of profit. It is caused by slow-paying customers. Invoice finance helps smooth that gap and keeps your business operating confidently while you wait to be paid.
Why businesses use
invoice finance
If your business invoices other businesses and offers payment terms, you are effectively providing credit. That can work well until growth accelerates or larger contracts begin to stretch your cash position.
- Invoice finance is often used when:
- You are growing quickly and need working capital to keep pace
- Large clients dictate extended payment terms
- Seasonal fluctuations affect cashflow, or
- You want predictable access to funds linked to your sales
Rather than taking on a traditional loan, invoice finance grows in line with your turnover. As your invoicing increases, the funding available can increase too.
Types of invoice finance
Invoice finance is not a single product. There are several ways it can be structured depending on how much control you want to keep and how regularly you need funding.
Factoring
Factoring allows you to release funds from unpaid invoices, and the finance provider usually manages your credit control.
1. You raise an invoice
2. The lender advances a large percentage of its value
3. Your customer is notified to pay the finance company directly
4. The lender may handle payment, chasing and collections
This can be useful for growing businesses that do not have a dedicated credit control team or want to outsource collections.
There are two variations
Recourse factoring
This is where you remain responsible if your customer does not pay.
Non-recourse factoring
This is where the lender may take on the credit risk, subject to approval.
Factoring is more visible to your customers, but it can remove administrative pressure.
Invoice discounting
Invoice discounting works in a similar way in terms of releasing cash from invoices, but your business retains control of customer payments and credit control.
Your customers continue to pay you as normal. The funding arrangement can often remain confidential.
You receive an advance against approved invoices and repay the lender once your customer settles. In exchange for this, you pay a service fee and a discount charge on the funds used, think of this charge as being similar to interest on an overdraft facility.
Invoice discounting is often suited to established businesses with strong internal systems that want to improve cashflow without involving a third party in customer relationships.
selective or spot
invoice finance
Selective invoice finance, sometimes referred to as spot factoring, allows you to fund individual invoices rather than your entire sales ledger.
Instead of committing all invoices to a finance provider, you choose specific invoices to release cash from, as and, when you need to.
- This can be useful if you:
- Have one large invoice creating pressure
- Only need occasional support
- Don’t want a long-term agreement
This route offers more flexibility, but pricing can vary significantly if you opt for this more selective approach. Some lenders may only be set up to include every eligible invoice in your system as part of an invoice finance agreement.
How does it work?
Once approved, you submit invoices to the finance provider. They release an agreed percentage, often within 24 hours.
Although the structure may vary depending on the type of invoice finance chosen, the principle remains consistent.
1
Once approved, you submit invoices to the finance provider
2
They release an agreed percentage
3
When your customer pays the invoice, the remaining balance is released to you, minus the agreed fees
With factoring, the lender manages collections and customers pay them directly. With invoice discounting, you remain in control of collections, and your customers typically pay you as usual.
With selective invoice finance, you choose which invoices to fund rather than committing your full ledger. The right option depends on how much control you want, how consistent your cashflow needs are and how your business operates day to day.
What do lenders
TYPICALLY LOOK FOR?
- Lenders will assess:
- The quality of your debtor book
- Your trading history
- The creditworthiness of your customers
- Ongoing trading stability
Invoice finance is typically suited to business-to-business companies rather than consumer-facing businesses.
Why Meridan Finance?
The structure of an invoice finance agreement should match your business model and customer base. The world of commercial finance can be complex, this is why
Meridan Finance aims to make it simple, firstly, by helping you to understand the invoice finance options that may be open to you and secondly, by connecting you to lenders that suit your sector.
If cashflow feels tight despite strong sales, invoice finance could provide the breathing space you need.