Invoice finance is a way of borrowing money based on what your customers owe to your business. Unpaid invoices represent money that will be paid to you, but you have to wait for the payment terms to elapse, which could be anything from 14 days to 90 days or more. Invoice finance gets you most of the cash immediately, so you don't have to wait to get paid.
The concept is simple — rather than waiting days or weeks for your invoices to be paid by customers, lenders advance you most of the value immediately. That means you get paid faster for completed work, so you can focus on running your business.
There are two different types of invoice finance, invoice factoring and invoice discounting. In addition, customer invoices (also known as "receivables") can be used as some of the security for a secured loan.
Invoice Factoring is the product where the lender is most closely involved. They will provide ‘credit control’ services to ensure your customers pay on time, which might be exactly what you need — to focus more on your business, instead of chasing late-paying customers.
- Credit control services: the lender handles collecting payment from your customers.
- Your customers will know you’re using a factoring provider.
- Factoring providers can credit check potential customers for you.
- Easier to secure for small or early-stage companies.
Invoice Discounting is the most straightforward form of invoice finance. It is more hands-on for the business using the facility, and is generally only available to more established businesses with higher turnover.
Unlike factoring, if you choose discounting you’ll still have to do your own credit control to ensure customers pay on time. The lender simply provides an advance secured on the book of receivables owned by the company.
Selective invoice finance allows you to choose specific customer accounts to finance, while spot factoring allows you to choose specific invoices. Either way, you can take a more flexible ad-hoc approach, and get funding when you need it. In particular, these have become key elements in the peer-to-peer lending sector.