The ‘Ins’ and ‘Outs’ of Invoice Financing

Invoice financing is a term that has been gaining traction recently, as payment methods move on from traditional approaches to explore new areas of co-operative working. Invoice financing is a general phrase that describes a third party agreeing to purchase a company’s unpaid invoices for a fee or percentage of their overall value. These third parties can be finance-based businesses, sections of a bank or other specialist, independent organisations.

Invoice financing can also refer to individuals or groups using crowdfunding platforms like Market Invoice to access wealthy sources of income to finance a project, rather than going to a bank for a loan.

Two main categories exist within UK invoice financing: invoice factoring and invoice discounting. Invoice factoring involves a specialist financier managing the ledger on a company’s behalf and chasing the money owed to that company directly. The customers of that company will be made aware of the arrangement and will need to pay the financing organisation to settle their debt. The company will receive a percentage of the invoice total(s) up front and the remainder will follow once the customer has paid the financing organisation, minus a service charge to cover interest and fees.

Invoice discounting, on the other hand, does not involve the financing organisation taking charge of the company’s ledger. Instead, it works along similar lines to arranging an overdraft with the bank. The financier lends the company enough money to cover an agreed percentage of their outstanding debts against the unpaid invoices, for which the company must pay a service fee.

The company must pursue its own customer debts, but has the funds to cover any shortfall in the meantime. This maintains discretion for any company using this service, as their customers need not be made aware of the arrangement.

Why Should I Consider Using Either of These Financing Methods?

Entrusting the collection of debts to a third party can be an attractive prospect as it can save time chasing customers, free up funds in the shorter term and add another source of financial advice and support. However, it can reduce profitability if service fees or interest is charged, plus it could affect your company’s credit rating as it is considered a form of financing in itself. It is more commonly seen in agreements between commercial companies (B2B), as opposed to companies dealing directly with consumers (B2C).

The key point to think about is whether your need for short-term cash going to be a regular concern, or if you simply need to sort out a temporary invoicing issue. It is always best to sit down with any customers who are late paying you to work out what the problem might be, and how you can move forward in the future.

A key selling point to invoice factoring and discounting is the flexibility offered. You can choose when and how many invoices to ‘sell’ – some companies even let you sell one invoice at a time. You can plan your short-term cashflow more easily and it stops you from being hindered by slow-paying customers. Finally, invoice financing can free up funds to pay employees and reinvest in your business operations and assets.

If you are considering ways to manage your invoicing process, always consult a financial expert first to ascertain which approach is best for your company. You can find invoice software for your small business at to help streamline your AP/AR processes. Keep comprehensive financial records to help with your financial forecasting, payroll, tax obligations and expenses. Using dedicated receipt management software, such as Receipt Bank can streamline your expenses process and help you keep closer track of your overall financial position.

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