As many sectors sell their products or services on a credit basis rather than in an upfront exchange, trust is placed on customers to settle invoices in a timely fashion with a specified due date. 

Unfortunately, every SME knows the struggle of having to chase invoices, being paid late or not being paid full stop. Although there are laws in place for late payments, it doesn’t help you in the short term. Unpaid outstanding invoices disrupt your cash flow and broader financial planning for your business. You need to pay your staff, meet expenses, and invest in operations if you want to be successful. But you can be held back by a lack of prompt payment for work already serviced.  

If you need access to funds quicker than invoices are being paid, you could consider invoice financing. Read on to find out more.

What is invoice financing? 

Also known as ‘accounts receivable financing’, invoice financing means you borrow based on outstanding money due and billed. Usually, you’ll pay an agreed portion of the invoice as a lending fee. The invoices are usually classed as collateral to lower the risk to the lender, so they differ from other financial products. 

Is invoice financing right for my business? 

As you have quicker access to funds, invoice financing is very advantageous for healthy cash flow, which is crucial for an effective business. It doesn’t replace revenue, however, as there is a risk of an invoice never being paid. 

It’s not as complex as applying for a loan in more traditional financing options. Nevertheless, there is still a cost associated with the lending so you have to make sure your company can support this charge. You’ll need to be certain that the business coming in can cover it.

It’s also important to note that invoice financing is only an option for business-to-business invoices. 

What are the different types of invoice financing?

Most lenders won’t cover the total invoice amount, but the portion they’ll offer differs based on the type of financing chosen.

Invoice factoring: You would sell your invoice to the lender for around 75% of its value, on average. Customers settle the outstanding amount with the lender, who chases for the balance to be paid. When the invoice is paid, the lender will take their initial spend and lending fee from that amount and then pass the remaining balance back to you. 

Invoice discounting: The lender sends you an advance of around 90% of the outstanding invoice. It’s your responsibility to chase for payment. Once clients have paid, you repay the initial loan amount and settle the lender’s fee. 

It’s important to note that clients will often be aware if you’re using invoice factoring. As the lender settles the invoice, this could negatively impact the working relationships and reputation you’ve worked hard towards. As you’re the one to settle payments with invoice discounting, customers are less likely to know about it.