(Updated in May 2023)

What Is Invoice Financing?

Simply put, invoice financing is a quick, efficient, and hassle-free way to turn your unpaid invoices into cash. Instead of waiting weeks or even months to get paid, you receive up to 100% of your invoice value upfront.

Invoice finance is an accounting service in which invoice finance lenders purchase unpaid invoices from businesses that need an advance on their payments. This finance facility gives businesses instant access to funds and reduces potential cash flow issues in exchange for an invoice financing fee.

You get the money you need to cover your expenses while the lender chases up your invoice payment load in the meantime. Once the invoice amount is paid in full, the lender will release any remaining payments to you.

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How does invoice financing work?

Your individual debtors or entire sales ledger are reviewed and — once approved — the lender factors any outstanding invoices. With efficient providers, such as Sonovate, you can get same-day or next-day payments with 100% of your invoice value. 

With your receivables sitting readily in your bank account, you can use this capital to: 

  • Pay your contractors and employees.
  • Purchase more stock.
  • Complete your project.

The service you receive depends on the type of invoice financing you choose — factoring or discounting. 

For invoice factoring, invoice financing companies eliminate the burden and take on the responsibility of chasing every unpaid invoice. Alternatively, your credit and collections team takes over the duties for invoice discounting.


Why do businesses use invoice finance companies?

Business owners turn to invoice financing because billions of pounds are tied up in unpaid or late invoices every year, a figure that grows exponentially. According to The Business Disputes Register’s UK report, 30% of invoices aren’t paid within the agreed payment term and 1 in 5 insolvencies are attributed to late payments. 

This is an issue for many businesses that rely on a steady cash flow to operate, such as manufacturing companies to acquire raw materials and healthcare to cover the cost of medical equipment. Recruitment agencies also face challenges with cash flow due to the time gap between employee payment and client invoicing.

Fortunately, these organisations can take advantage of many perks associated with invoice financing, the most obvious being instant access to cash and steady revenue for your business. Here are some additional benefits invoice financing has to offer. 

The Benefits of Invoice Financing

1. Access to Capital. With access to capital, businesses obtain the resources required to pay off expenses and invest in new areas. This helps you complete projects on time, build your workforce, and grow your business to enter new markets and develop products and services.

2. Startup Friendly. Invoice financing is extremely beneficial for small to medium-sized enterprises (SMEs) and startups. This is because they may not be eligible for other forms of financing, such as a bank loan or overdraft. This reduces credit risk for an improved credit rating, which opens up future opportunities for your business.

3. No More Chasing. If you’re a small business that doesn’t have the resources to be constantly chasing clients, you’re not alone. The Business Disputes Register also found that 90% of small business managers don’t have access to the information or tools required to assess whether they’re trading with insolvent companies. Invoice factoring can address this issue and free up valuable time better spent elsewhere.

4. Fast and Flexible. Invoice finance providers offer a faster and more flexible way to plug the cash flow gap in a business. You won’t need to wait for the approval of a business loan. Instead, the invoice finance company allows you to get cash within a short time period, so you can proceed with important initiatives.

5. Payment Clarity. Furthermore, an invoice financing company can help you screen potential clients and provide valuable insight into their credit and payment history. This allows you to make informed decisions on what clients to take on for optimised reliability.

How much does invoice financing cost?

Typically, invoice factoring is made up of a single service fee that’s deducted from the outstanding invoice. When it comes to invoice factoring, the lender is also in charge of collecting outstanding payments from your debtors. Therefore, this type of invoice finance is more expensive than invoice discounting.

Typically, invoice discounting costs comprise two fees: 

  • The service fee: This is charged per invoice and calculated as a percentage of your turnover.
  • The borrowing fee: This increments with interest until the client pays their invoice.

Other hidden fees potentially associated with an invoice finance facility include: 

  • Application fees.

  • Credit check fees.

  • Mailing fees.

  • Processing fees. 

It’s important to remain vigilant of these before you sign an agreement.

Invoice Factoring and Invoice Discounting: What’s the Difference?

Let’s take a closer look at each of these options to help you choose the right one from several invoice financing companies in the UK.

Invoice factoring entails a closer working relationship with the factoring company. A business will sell its outstanding invoices to a factoring organisation at a discount. The financier then provides you with their professional credit control services so that you can focus on other aspects of your business. This is ideal for SMEs that may not have the time or resources to chase late-paying clients.

Invoice discounting is the most simple form of invoice finance because it’s pure money. You’re in charge of collecting payments — your clients don’t need to know that you’re using a finance facility to advance payments.

Invoice discounting is only available to larger businesses with more established reputations, typically with a minimum turnover of £250k. These companies tend to have their own collections team who are entrusted to collect the payments from their customers by themselves.

Ultimately, the decision between invoice finance factoring and invoice discounting rests on the size of your company’s turnover. It all depends on whether you want to collect the payments yourself, or wish to be discreet about the invoice financing facility. 

Many companies enjoy the credit control service offered by factoring facilities because it gives them the capital and time needed to focus on growing their business. Others prefer a more hands-on approach when it comes to collecting payments, as this retains their use of confidential invoice discounting services.

Sonovate’s Platform

Think invoice financing could support your business growth? 

Sonovate provides an invoice finance solution designed to reduce admin, save time, and let you focus on growing your business. Choose from an all-in-one funding and back office platform, or just business funding to complement existing systems, give flexibility when you need it, or grow engines when the time is right.

Here are just a few unique benefits Sonovate has to offer:

  • Super simple setup
  • No hidden fees or charges
  • Free from long contracts
  • We advance up to 100% of the value of your outstanding invoices
  • Bad debt protection included

How To Apply

To find out more about how Sonovate can help your business grow, contact us today! Alternatively, you can book a short demo with us, and one of our team experts will introduce you to our comprehensive platform at a time that suits you.