Invoice finance: What is it and why do you need it? - Sonovate Invoice finance: What is it and why do you need it? - Sonovate Skip to content

Invoice finance: What is it and why do you need it?

In an article published earlier this year on Global Trade Review’s website, Matthew Davies, director of invoice finance and asset-based lending at UK Finance, commented There is increasing understanding amongst businesses of all sizes of how invoice finance and asset-based lending can support them as they grow.”

And we agree. Invoice finance is becoming increasingly more popular amongst businesses of all sizes in the UK. With so much competition, and demand for services, a business can benefit from using an invoice finance provider to help them manage their cash flow and scale successfully.

If you’re reading this article, the chances are that you’re looking at your invoice finance options. So, to help you out, we’re going to break down exactly what invoice finance is and why you need it.


What is invoice finance?

Before we can go into why you need it, let’s first discuss what invoice finance is.

Also traditionally known as ‘accounts receivable financing’ and ‘receivables financing’, invoice finance is a form of asset-based lending.

If you’re looking for a strict definition, invoice finance is (according to Investopedia):

“…a way for businesses to borrow money against the amounts due from customers. Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the money.”

Here’s how invoice finance works:

  • Once you’ve chosen your provider and signed a contract, you issue an invoice to your customer in the usual fashion.
  • You also send a copy of this invoice to your invoice finance provider.
  • They pay you an advance on that invoice (ranges between provider from 60-99% of the invoice value.)
  • Your customer then pays the invoice when their payment is due.
  • Finally, you receive the invoice balance, minus your provider’s fee(s).
  • As the advanced payment is secured against your unpaid invoice for your client, only the invoice is used as collateral.


Why do businesses need to use invoice finance?

Late payment of invoices is an overwhelmingly common issue for SMEs. If it happens as a one-off, the damage is not too bad. But, in reality, these late payments are a regular thing.

Stalls in cash flow can quickly bring a business to its knees, especially when your business relies on incoming finances to keep business going.

This is why invoice finance is key to the success of many businesses as it enables a business to always get paid on time when they issue an invoice.


What are the benefits of using invoice finance?

We’ve already touched on the benefits of invoice finance to your business, but we’ll look at these in more detail.

  1. You know you will always be paid on time whenever you issue an invoice to one of your customers, and you’ll know how much money is coming into your account. This means you are able to manage your cash flow successfully, and keep an eye on your outgoings.
  2. Your invoice finance provider will take over the process of managing your sales ledger, as well as chasing your customers for invoice payments. This means you have more time to focus on doing more important tasks for your business – rather than spending time firing out emails and calling customers, you can use that time to work out how to grow your business.
  3. Invoice finance also means you can work with more clients, as you are not restricted by finances. This gives the opportunity to grow, to branch out to new sectors and audiences and to stay ahead of your competition.
  4. It also means you won’t be susceptible to bad credit ratings, so you are able to get other types of business credit if you want.


Aaron Hughes, Managing Director at Equiniti Riskfactor, said:

Invoice Finance continues to be the preferred method of business lending for SMEs in the United Kingdom, outstripping overdraft lending to SMEs. It is regarded as the optimal way to fund business growth because lending is directly linked to, and secured on, their customer’s sales ledger and so its continued growth over the past few years is unsurprising


Are there different types of invoice finance? If so, what’s available?

Invoice finance comes in several different forms. The most common ones being:

  • Invoice factoring
  • Invoice discounting
  • Confidential invoice discounting (CID)
  • Confidential Factoring
  • Disclosed Factoring with Back Office

You can learn more about what each of these are, as well as other factors to take into consideration, in our blog, Five things to know when choosing invoice finance for your recruitment agency.

Choosing which provider to go with can feel like a challenge. There are so many different options to choose from, as well as an abundance of jargon to understand, terms and conditions to comply with and hidden fees to uncover.

To make this process easier, we’ve shared the seven essentials of invoice finance.


Invoice finance isn’t for everyone and, if your business is in a place where it can support itself, now might not be the right time to find a provider.

But, even if this is the case, there is no harm doing your research and seeing what options are out there. A good invoice finance provider will offer the following:

  • No restrictions, such as all-turnover agreements and concentration limits
  • One small fee to use their services
  • No hidden fees, extra costs and additional charges
  • Excellent customer service
  • An intuitive back office, designed to make your life easier across the board

If this sounds appealing, see what Sonovate can do for your business.

21 costs you can avoid when funding your contractors

See all the fees you could be charged and how to avoid paying them in our eBook.

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