What is Invoice Finance? | Ultimate Guide
Updated: Oct 6, 2021
What is Invoice Finance?
Invoice Finance is a general term that refers to facilities that enable a business to generate working capital though their receivable assets (Invoices your business has raised for sales completed but have not yet been paid). Get Invoice Finance Here.
It covers facilities such as:
CHOCS (Client Handles Own Collections Services)
ABL (Asset Based Lending)
How does Invoice Financing work?
There are a number of different variations, with some main differences. One of the main decisions to make with Invoice Finance is whether you want your clients to know you are using a facility or not.
Invoice Discounting (Sometimes referred to as CID - Confidential Invoice Discounting) is a confidential facility i.e. your clients would not be aware that you are using the facility. Your business maintains all contact with your client and is responsible for credit control / collections etc - in the same way as if a funder was not involved.
Many clients like this because it gives them the benefit of a great funding line without losing any of the day-to-day contact points with their client.
Factoring on the other hand is a disclosed facility. In other words your client will be aware of the lenders involvement and interest in the debt / invoice. This is because with factoring, the lender also becomes responsible for the credit control / collection of the debt.
This can be useful for a number of reasons - where a lender is involved, often an invoice will be prioritised for payment.
Using a factoring facility to manage your accounts payable can free up a business to focus on their area of expertise. If trading internationally you can make use of the factoring companies multilingual staff.
Who is Eligible?
Companies that sell a product or service to other businesses (B2B Sales) - i.e. those businesses that have Trade Debtors.
Generally, lenders find industries and debt that is not highly contractual easier to fund although there are lenders who specialise in debt of a more contractual nature.
Invoice Finance is available to businesses at all stages of it's lifecycle whether it is new start or established 100 years. Invoice Finance is also available regardless of your credit score - because the main security for this type of funding is the debt (Invoice) it is often your customers credit worthiness that will govern the availability of funding.
Many sectors and industries lend themselves to Invoice Finance, the key requirement is that your business sells to other businesses. Those industries that commonly use Invoice Finance include:
Construction - Logistics - Manufacturing - Engineering - Printing - Packaging - Recruitment - Security - Transport - Wholesale - Distribution
Advantages of Invoice Finance
1. Increased Cash Flow - Invoice Finance will allow your business access to up to 90% of the value tied up in your unpaid invoices in as little as 24 hours
2. Confidential - With CID, your clients will never be aware of the involvement of the lender - you remain in control of the sales ledger
3. Enable Growth - Freeing up the cash from your sales ledger can enable your business to invest and take on new business.
4. Make your working capital work for you - Having access to working capital, your business could take advantage of early settlement discounts with suppliers or benefit from buying when the price is right.
5. Support with credit control - With Factoring the lender takes on the role of credit control - getting your debts paid on time and freeing you up to focus on what you are best at.
6. Better view of risk - lenders will also review the credit worthiness of those companies you are considering giving credit terms to - helping you to manage the risk.
7. Credit Insurance - It is also possible to arrange credit insurance to protect your business from the risk of bad debt
Invoice Finance FAQ
What are your fees?
All costs are covered by the lender when a facility successfully completes.
How much does Invoice Finance Cost?
This is dependant on a number of factors as the cost is a reflection of the risk involved in the transaction - We will professionally package your proposition to lenders and will negotiate the best possible terms.
What security will be required?
This will vary depending on the lender and the circumstances or your business. The main security is the debt itself, but often a lender will require the additional security of personal guarantee. We will work to provide a facility with a security package that you are comfortable with.
Will it damage the relationship with my customers?
Invoice Finance sometimes has an unjustly poor rep. Largely due to its earliest form of Factoring product in the 1980's where perhaps the focus from lenders was not as customer focussed as it is today.
The key focus of Factoring providers is customer service and maintaining the relationship of their clients - where payment terms are not adhered to, the lenders experienced credit controllers are skilled in ensuring their clients invoices are prioritised whilst maintaining strong client relationships.
Many users of Factoring facilities see this as a real benefit as it means the business does not need to have "difficult" conversations with its clients.
Alternatively, if you chose to use confidential Invoice Finance your client relationship is not impacted at all.
How will Aim help?
Whether your business has an existing Invoice Finance Facility or if you are exploring what kind of facility would suit your needs best, we will take time to understand your business and what your priorities are to ensure that you are matched with a lender and facility type that supports what you are trying to achieve.
Having worked within the Invoice Finance industry for many years, we have the expertise and experience to guide you through the process and make sure that your business has the best outcome and the best facility. Whether your business has an existing Invoice Finance Facility or if you are exploring what kind of facility would suit your needs best, we will take time to understand your business and what your priorities are to ensure that you are matched with a lender and facility type that supports what you are trying to achieve.
Having worked within the Invoice Finance industry for many years, we have the expertise and experience to guide you through the process and make sure that your business has the best outcome and the best facility.
From initial enquiry to successful implementation can be completed comfortably within 1-2 weeks (potentially quicker if needed). There are a few pieces of key information needed to review and underwrite and we will work with you in order to complete the request within your desired timeframe.
To enable us to get you a free quote we would need the following
A copy of your most recent set of filed accounts
An up to date Aged Debtors Report
If you have an existing facility, please provide the last 12 months' statements from your current provider.