What is Invoice Financing?


This is one of a number of questions in this area of business that we’re regularly asked to explain or comment upon.

Here, we at ACF Direct will share some of those and our answers. They should help to explain this important area of financial management and flexibility.

What exactly is invoice financing?

It is a way of you being able to obtain rapid funds into your bank account. That money is linked to your sales ledger (US – Accounts Receivable) in the form of the invoices you’ve raised and sent to your clients.

This means you don’t have to wait until your invoices are paid before you have funds available to drive your business forward.

Why might I need invoice financing?

One of the commonest problems companies encounter with their business finance is that of “cash flow troubles”.

A typical cause of that is when you’re experiencing delays in getting your invoices paid by your customers. You might be paying your bills promptly and professionally but if some of your customers aren’t doing likewise for you, then you may run into difficulties in terms of sustaining your business operations. It’s called a “cash flow imbalance” and it’s something that can and does bring businesses down.

Invoice financing may be able to help you avoid or reduce that risk

How does this all work?

Basically, you will raise your invoice(s) to your clients as usual. Then, you’ll have potentially one of two options to choose from:

  • invoice factoring;
  • invoice discounting.

In both cases you will essentially pass copies of your invoices to external service providers, who will then arrange for money to be paid to you.

Invoice factoring typically involves the third party paying an immediate percentage (perhaps up to 85%) of the invoice value to you. They will then take over responsibility for collecting the total sum from your client. It will be as if you have sub-contracted the business of collecting your monies due to a third party.

This will be visible to your client. When they pay their invoice, the intermediary will pay over the remaining 15% to you minus their agreed percentage.

Invoice discounting is slightly different. It involves the third party lending you money against the invoice you’ve raised. You will continue to be responsible for trying to get your client to pay your invoice so you can repay the loan amount. This will be invisible to your client.

You can see a full government (Scotland) definition here.

How much will these invoice finance options cost?

Virtually all forms of external business finance will involve you in cost. That is true for invoice finance options.

In the case of invoice factoring, the costs will be an agreed percentage of the invoice value you’re passing over.  In the case of invoice discounting, there will typically be a combination of interest rate and service fee.

All this is typically agreed in advance between you and the service provider. Many companies simply build these cash-flow management costs into their pricing models.

What happens if my customer never pays the invoice?

That will depend upon your contractual agreement with the invoice finance provider.

Typically the responsibility for the loss will ultimately reside with you. Do read your contract carefully to be sure what that would mean in reality.

What will I need to use these services?

Typically, the invoice finance provider will need to see that:

  • you’re a reputable trading company with some form of verifiable track record and an acceptable credit history;
  • your clients are likewise, meaning that they will be likely to pay your invoices within an agreed time period (thereby reducing the service provider’s risks).

Which of these services would be most appropriate for me?

Unfortunately, that’s impossible to say without knowing more about your company and its sales ledger portfolio as well as your overall business finance position.

Why not call us for a further discussion?