Invoice financing helps a business get money sooner from bills it has sent to customers. Instead of waiting for the customer to pay, a lender gives the business most of the money first. When the customer pays later, the lender sends the rest, minus its fees.

How the Process Works

1. Invoice sent: Your business does work or sells something and sends a bill to the customer.

2. Money paid early: You give the bill to the finance company, and it gives you most of the money straight away.

3. Customer pays: When your customer pays the bill, the money goes to the finance company.

4. Rest of the money: The finance company sends you the rest after taking its charges.

Main Types of Invoice Finance

There are two main types of invoice financing in the UK:

• Invoice factoring: The finance company keeps track of your customer bills and helps chase late payments.

• Invoice discounting: You stay in control of your customer bills, and your customers may not know you are using finance.

Costs involved

There are usually two main charges:

• Service fee: A charge for running the service.

• Borrowing charge: Extra money you pay for getting the money early.

Things to keep in mind

• High costs: This can cost more than other ways of borrowing, like a loan or overdraft. You may have to pay a service fee and another fee for getting the money early. This means your business keeps less profit.

• Customer relationships: With invoice factoring, the finance company may chase your customers for payment. If they do this badly or too strongly, it could upset your customers and harm your business relationships.

• Dependency risk: If you use this money too often, your business may start to rely on it. That can hide bigger cash flow problems instead of fixing them.

• Paying money back: In many UK invoice finance deals, you may have to pay the money back if your customer does not pay on time. This means your business could still lose money.

• Who can use it: Lenders will check if your customers are likely to pay their bills. If your customers have poor credit, your invoices may not be accepted. This type of finance is usually for business-to-business sales, not sales to the public.

• What others may think: Some customers may think your business is short of money if another company is chasing payments for you.

• Personal guarantees: A director may have to promise to pay if the business cannot. If payments are missed or the business closes, that person may have to pay the money, plus extra fees.