What is invoice financing?

How does invoice financing work?Invoice financing is a type of short-term funding that allows businesses to free up cash that is tied up in unpaid invoices. Essentially, the business sells its invoices to a lender at a discount, and the lender provides the business with a cash advance.

This can be an attractive option for businesses that are waiting on payments from customers but need cash to cover expenses in the meantime. Invoice financing can help businesses avoid late fees, maintain a healthy cash flow, and take advantage of opportunities that might otherwise be out of reach.

However, it is important to remember that invoice financing is a form of debt, and businesses will need to eventually repay the loan (plus interest) in full. As such, invoice financing should only be used as a last resort after all other options have been exhausted

How does invoice financing work?

Invoice financing is a form of short-term borrowing that enables businesses to access funds quickly by leveraging their outstanding invoices. In this type of financing, a third-party lender, such as a bank or a specialized financing company, advances a percentage of the value of a business’s outstanding invoices, typically ranging from 70% to 90%. The lender then collects the invoice payments from the business’s customers and deducts their fees before remitting the remaining amount to the business.

The process of invoice financing is relatively straightforward. Once a business has completed a sale and issued an invoice to its customer, it can submit the invoice to a lender for financing. The lender will typically review the invoice and the creditworthiness of the customer before deciding to advance funds.

Once approved, the lender will transfer the funds to the business’s account, allowing it to access the cash it needs to manage its cash flow. When the customer pays the invoice, the lender deducts their fees before remitting the remaining amount to the business. Invoice financing can be a convenient way for businesses to manage their cash flow and maintain their operations, especially when they have outstanding invoices that take a long time to be paid.

What is an invoice finance facility

An invoice finance facility is a type of financing arrangement that allows businesses to access funds by leveraging their outstanding invoices. It is typically provided by specialized financing companies, banks, or other financial institutions.

This type of facility allows businesses to borrow against the value of their unpaid invoices, providing them with an immediate injection of cash that can be used to fund their operations or invest in growth opportunities. Invoice finance facilities are usually structured as revolving credit facilities, which means that businesses can draw on the facility as needed and repay the borrowed amounts as they collect payments from their customers.

The amount that businesses can borrow under an invoice finance facility is typically determined by the value of their outstanding invoices and the creditworthiness of their customers. Overall, invoice finance facilities can provide businesses with a flexible and convenient way to manage their cash flow and support their growth.

Advantages of invoice finance

Invoice finance is a type of funding that allows businesses to borrow money against the value of their unpaid invoices. This can be an extremely helpful form of financing for businesses that are struggling to stay afloat, as it provides them with much-needed liquidity without having to resort to more expensive forms of borrowing. There are several key advantages to invoice finance, including the fact that it is relatively easy to qualify for and can be accessed quickly.

Additionally, invoice finance can be a flexible form of funding, as businesses can choose to borrow against specific invoices or groups of invoices. This flexibility can be extremely helpful in managing cash flow. Finally, invoice finance can be an affordable form of funding, as the rates charged are typically lower than other types of business loans. As a result, invoice finance can be a valuable tool for businesses that are looking for ways to improve their financial situation.

  • Gives your business quick cash– One major advantage of invoice financing is that the ability to raise cash quickly for your business. Funds are available as soon as an invoice is issued and this money can be used for business growth, pay taxes, wages or outstanding creditors.

  • Quicker turnaround– This type of business business finance is comparatively quicker than applying for a business loan, as such the turnaround time can be done in seven days. It will also assist with cashflow as you will not be waiting for your debtors to pay you.

  • No risk to assets– No assets or security are required for Invoice financing as it is called as an unsecured business loan, this invoice itself is the asset.

  • Boosts credit sales–  Credit sales can be boosted with invoice discounting, this type of finance allows you to convert credit sales into cash, which means that an SME business can enjoy quicker growth and development in a shorter amount of time.

Types of invoice finance

When it comes to business finance, invoice factoring is a popular option for many companies. There are two main types of invoice finance: recourse and non-recourse. With recourse invoice finance, the lender has the right to collect payment from the debtor if the debtor does not pay the invoice. Non-recourse invoice finance protects the lender from debtor non-payment, even if the debtor declares insolvency.

Each type of invoice finance has its own advantages and disadvantages, so it’s important to choose the right option for your company’s needs.

Here are the two product categories within invoice finance:

Invoice Factoring 

When businesses invoice for goods or services, they usually have to wait 30, 60, or even 90 days for payment. This can put a strain on cash flow, making it difficult to meet expenses and fund growth. One way to overcome this challenge is to factor invoices. Factoring allows businesses to sell their outstanding invoices to a third party at a discount in exchange for immediate payment.

This can provide a much-needed infusion of cash, giving businesses the resources they need to stay afloat. While invoice factoring can be an expensive way to obtain funding, it can be a lifesaver for businesses that are struggling to make ends meet. When used wisely, it can help businesses keep their doors open and their lights on until they can get back on solid financial footing.

Invoice Discounting

When businesses invoice their customers for goods or services, they typically have to wait 30, 60, or even 90 days to receive payment. This can put a strain on their cash flow and make it difficult to meet their short-term financial obligations. Invoice discounting is a type of financing that can help businesses bridge the gap between invoicing and receiving payment. With this type of financing, businesses sell their receivables at a discount to a third-party lender.

The lender then provides the business with a lump sum of cash, minus a fee for the service. This can give businesses the funds they need to keep operating while they wait for their customers to pay their invoices. Invoice discounting can be a useful tool for businesses that need to improve their cash flow but want to avoid taking on debt.

Restrictions of invoice finance

When a business sells products or services on credit, it means that the customer pays at a later date. This can help businesses to ease cash flow problems, but it also means that businesses have to wait for payment. Invoice finance is a way for businesses to get paid for their invoices immediately, rather than waiting for the customer to pay.

However, there are some restrictions on invoice finance. For example, businesses must have a good credit rating in order to be eligible for invoice finance. In addition, businesses must have invoices that are due from creditworthy customers. As a result, invoice finance can be a helpful tool for businesses, but it is not suitable for all businesses.

  • Your customers will need to be other businesses– Invoice financing is only available if you trade with other businesses on commercial credit terms this means that your customer cannot be the general public.

  • Invoice factoring and client relationships– If your chosen product is  invoice factoring, then collection of outstanding payments will be out of your hands. Your client relationships could suffer and be impacted by this and there’s a risk of damaging these relationships.

  • Longer-term costs- Invoice financing is a great short term solution if your business has cash flow issues, but if used long term the costs can add up. A few things worth considering are interest rates and the processing costs associated with lenders if you choose invoice factoring.

Selective invoice finance and spot factoring

Two of the most popular types of invoice finance are selective invoice finance and spot factoring. With selective invoice finance, businesses can choose which invoices they want to finance. This allows them to free up working capital without incurring debt or losing control of their accounts receivable.

Spot factoring, on the other hand, involves financing a single invoice. This can be a useful option for businesses that need a quick infusion of cash but don’t want to commit to a long-term financing arrangement. Both selective invoice finance and spot factoring can be helpful tools for businesses that need to improve their cash flow.

Both of these products are good if you do not require a full factoring facility and just wish to finance a single invoice or a single customer. You can apply here for a facility.

An example of invoice factoring for business

An example of invoice factoring for business is when a business sells its receivables at a discount to get cash up-front. The receivables are the amounts owed to the business by its customers for goods or services that have been provided. In order to get cash up-front, the business will typically sell the receivables at a discount to a third party, known as a factor. The factor will then collect the payments from the businesses’ customers.

Invoice factoring can be a useful tool for businesses that need cash quickly, but it can also be expensive. The business will lose out on the interest that it would have earned if it had waited to receive payment from its customers. Additionally, the business will be responsible for any bad debts that are incurred by the factor.

ABC Limited is owed £5,000 by a client for a completed work, but the invoice has payment terms of 30 days. ABC Limited agrees to an invoice finance deal that will give the business 85% of the invoice up-front, with total fees and charges at 3%.

Invoice Factoring Costs:

Invoice value = £5,000 Advance amount (85%) = £4,250 Fees (3%) = £150 When ABC Limited presents the invoice to the lender, the business will receives an advance of £4,250 within 24 hours. Then, once their customer has paid the invoice, the full £5,000 goes into a bank account which is controlled by the lender.

ABC Limited will then get the remaining value of the invoice (£750) minus fees (£150), so ABC Limited will then receive £600.

Both types of invoice finance functions are identical under this principle, so you can choose which type of finance suits your business the best. To get started today and find the right invoice finance option for your business needs.


In conclusion, invoice financing is a flexible and accessible financing option for businesses looking to improve their cash flow and manage their working capital effectively. With its numerous benefits, such as providing immediate access to funds, maintaining a healthy cash flow, and allowing businesses to invest in growth and expansion, it’s no wonder that invoice financing has become increasingly popular among small and medium-sized enterprises.

As a result, businesses can avoid the challenges of late payments and unpaid invoices while focusing on their core operations and achieving their growth objectives. Ultimately, invoice financing can be a valuable tool for businesses looking to improve their financial health and succeed in today’s competitive business environment.

Business Finance Expert at Business Insolvency Helpline | + posts

Lee Jones is a seasoned expert in the field of business finance with over two decades of experience. With a keen understanding of financial markets and a passion for helping businesses thrive, Lee has become a trusted advisor to countless companies across the United Kingdom.