Find out what invoice finance rates are available to you

Invoice finance is a form of borrowing where you can use your unpaid customer invoices as security against the loan. This provides your business with an immediate cash injection whilst you wait for invoices to be paid. Instead of waiting 30, 60, or even 90 days for your customers to pay, an invoice finance provider will advance you a large percentage of the invoice value right away for a specific period of time. Invoice finance is often used to bridge the cash flow gap caused by slow-paying customers and clients.

With this type of finance, the lender is essentially buying your invoice from you at a discounted rate in exchange for immediate cash. Invoice finance can work in different ways, but a typical deal may play out as follows:

1. Invoice is Raised – Your business delivers goods or services and sends an invoice to a business customer.
   
   

2. Funds are Advanced – You send a copy of the invoice to the finance provider, who immediately advances you up to 90% of the invoice’s total value as an advance.
   
   

3. Customer Pays – When your customer eventually pays the full invoice amount, the money goes directly to the finance provider.
   
   

4. Balance is Paid – The finance provider pays you the remaining balance of the invoice, minus the interest (known as the ‘discount charge’) and service fee.

With invoice finance, the interest is referred to as the ‘discount charge’. Interest is calculated daily on the amount of cash the lender has advanced to you (not the full invoice amount). You stop paying interest the moment your customer pays the invoice – so if a customer pays 15 days early, you save 15 days’ worth of interest. This makes it highly flexible and cost-efficient for early payments. The interest rate is almost always set as a margin above a benchmark rate, usually the Bank of England Base Rate (BoE BR). Rates typically sit between 1.5% and 5% above the BoE Base Rate, depending largely on the creditworthiness of your business and your debtors.

As mentioned, invoice finance providers typically charge interest (the discount charge) and a service fee. When taken together, the total cost typically sits between 1% and 5% of the total invoice value.

Although some providers offer Bad Debt Protection (BDP) for an extra charge, this isn’t standard. Also, BDP usually only applies if the customer becomes formally insolvent (bankrupt or liquidated).

Without BDP, if your customer fails to pay by the date you arranged with the lender, your business will continue to pay interest for every extra day the invoice remains outstanding past its due date. The rate may increase the longer the payment is delayed. After a specified cut-off point (often 90 to 120 days past the invoice due date), you may be required to repay the original cash advance.

There are two main types of invoice finance. Both offer a similar end result, but differ in terms of who controls and manages the debt.

• Invoice Factoring – The finance provider takes control of your sales ledger and manages debt collection on your behalf, chasing any outstanding payments directly from your customer. For this reason, your customers may know you are using an invoice finance company.
  
  

• Invoice Discounting – Your business retains complete control of the sales ledger and continues to collect payments from customers confidentially. Your customers will generally be unaware that you are using a financing facility.

The benefits of invoice finance involve improved cash flow and accelerated business growth. It essentially enables you to turn slow-paying customer debts into immediate working capital, to support your day-to-day operations and growth initiatives. Let’s break down some of the key benefits below.

• Improved Cash Flow – You receive an immediate cash injection, often within 24-48 hours, rather than waiting 30, 60, or 90 days for customers to pay.
  
  

• Unlocks Working Capital – It allows you to free up capital that is otherwise tied up in accounts receivable, enabling you to use the funds for payroll, inventory, equipment, or investment.
  
  

• Rapid Access to Funds – It is often faster to arrange than traditional bank loans, providing quicker access to needed capital.
  
  
• Funding Increases with Sales – The amount of funding available to you automatically increases as your sales grow (without any need to reapply for approval).
  
  

• Flexible Interest Liabilities – If invoices are repaid early, you won’t need to continue paying interest on the advance, and there is no Early Repayment Charge.
  
  

• Saves Time and Resources – With Invoice Factoring, the finance provider (the factor) takes on the administrative burden of chasing and collecting payments, saving your business time and resources.
  
  

• Protects Against Bad Debt (Non-Recourse) – Under a non-recourse agreement, the provider assumes the risk of your customer being unable to pay due to insolvency, protecting your business from potential loss.