What does invoice financing really mean? - an itsettled explainer

Ever been in a meeting or reading an article and come across an unfamiliar phrase that throws you? Maybe you feel like you should know what it means, but you can’t quite put your finger on a definition. Well, itsettled is here to help. We’ve put together a series of explainer articles, where we’ll discuss common industry terminology and break down what it really means. 


Firstly, let’s get the definition of invoice financing right. 


Invoice financing is a way for businesses to borrow money against the amounts due from customers. It is also known as accounts receivable financing or receivables financing. 


Invoice financing is a form of short-term financing and allows businesses to use their unpaid invoices as collateral to finance their company and boost cashflow. The business will typically receive 75-85% of the invoice total, and when the invoice is collected, they will receive the remaining amount, minus the fees and/or interest the lender charges. Interest and fees can vary depending on the provider. 


A good example of invoice financing is a recruitment agency. If the recruitment agency has hired temporary staff on behalf of an employer, with the recruitment agency paying temporary staff themselves but invoicing their client for a month in arrears, they may benefit from invoice finance in order to keep a healthy cashflow. 


There are over twenty different types of invoice finance, the two most common types being invoice factoring and invoice discounting. Invoice factoring is at one end of the scale, whilst invoice discounting is at the other, with all other types of invoice provision coming in between them.


Invoice factoring involves uploading your invoices to a third party provider, who lend money against these invoices and who collect payment for the invoices on your behalf. 


Invoice discounting involves using a company to lend you the money, whilst you still collect the invoices yourself. Because there is no third party involvement in the collections process, some businesses prefer the confidentiality that invoice discounting offers. However, due to the amount of trust in the lendee that is required, Invoice Discounting can be harder to secure. Many smaller businesses may prefer to look towards the factoring end of invoice financing. 


So, let’s look at the pros and cons of invoice finance. 

Pros

  • Allows the business to boost cashflow and reinvest 
  • Relatively low risk for lenders and borrowers 
  • It can be a quick access point for finance 
  • Your business can be viable without the need to belong to a certain sector or within a certain region 

Cons

  • Depending on the type of invoice finance used, your customers may find out that you are using a third party group to collect invoices (although this is not necessarily as negative as it seems).
  • Generally, invoice finance providers will not take on overdue invoices or companies with a problem of late payments. Therefore, it doesn’t solve a businesses late payment problems. Luckily though, we can help!
  • You have to pay fees or interest, as with many loans.
  • Some Invoice finance providers will focus on specific sectors, so it’s best to reach out to a few to fully scope out your options. 

There is no right answer for any business - you can choose which one suits your business and your needs best. If you are interested in invoice financing and looking for providers, we have links with all major invoice finance companies. Please get in touch with us at members@itsettled.co.uk to discuss the best invoice finance option for your business. 


We hope you feel empowered to make the right financial decisions for your business with our itsettled explainer guides. If you have any questions, or would like to see us cover a new topic, simply email us at members@itsettled.co.uk