Understanding Invoice Finance: The Details
Invoice finance is an umbrella term that covers a range of funding solutions designed to unlock the cash tied up in your unpaid invoices. Below, we outline the main types and their key features so you can understand the details—or simply let us handle it for you.
Factoring
Factoring involves selling your invoices to a finance provider who advances a percentage of their value (typically 80–90%) and takes over credit control and collections. This option can save time on chasing payments but means your customers will know you’re using an external finance partner.
Key Points:
- Funding usually released within 24 hours
- Provider manages credit control and collections
- Fees typically include a service fee and interest on the amount advanced
Invoice Discounting
Invoice discounting is similar to factoring but allows you to retain control over your own credit management and collections. You receive an advance against your outstanding invoices but continue to manage customer relationships yourself.
Key Points:
- Confidential facility (customers usually unaware)
- Flexible funding that grows with your sales
- Often suitable for larger businesses with established credit control processes
Selective Invoice Finance (Spot Factoring)
This option lets you choose which invoices to finance rather than committing your entire sales ledger. It’s a flexible way to get cash when you need it without long-term commitments.
Key Points:
- Fund specific invoices or customers
- No obligation to finance every invoice
- Often quicker and simpler to set up
Construction Finance
Tailored specifically for businesses in the construction sector, this facility takes into account the unique contract structures and payment terms in the industry. It can help overcome the challenges of stage payments and retentions.
Key Points:
- Funding for certified applications or stage payments
- Supports complex contracts (JCT, NEC, etc.)
- Can cover retentions depending on the facility
Fees, Charges, and Terms
When considering invoice finance, it’s important to understand the fees and charges involved, as well as the terms that may apply. These vary depending on the type of facility and the lender you choose. Here’s a general guide:
Typical Fees and Charges
- Service Fee: Usually a small percentage of your turnover or the invoices funded. This covers the management and administration of your facility, including credit control (if offered).
- Discount Fee: Interest charged on the funds you draw down, calculated daily on the outstanding balance.
- Additional Charges: Some providers may apply other fees, such as arrangement fees, audit fees, or early termination fees. We always ensure these are fully disclosed upfront so there are no surprises.
Contract Terms
- Contract Length: Agreements can range from rolling monthly contracts to 12- or 24-month terms, depending on your preference and the lender’s policy.
- Notice Period: Typically required to exit a contract, this varies by lender but is usually between 30 and 90 days.
- Minimum Funding Requirements: Some providers may require a minimum percentage of your sales ledger to be funded each month.
- Personal Guarantees: Some facilities may require directors’ guarantees. We’ll always discuss this with you and negotiate where possible.
Important Considerations
While invoice finance can be a powerful tool for improving cash flow, it’s important to consider the potential costs, eligibility requirements, and impact on customer relationships. Each facility is structured differently and comes with its own terms and conditions, which can affect how your business manages its working capital.
We do this every day and understand the complexities of each option. Our role is to help you navigate the details and secure the best solution for your unique needs, saving you time and money.