Business Finance Explained: Invoice Financing

One key area of small business finance in the UK is invoice financing. This is where a company – a bank or a financial institution – buys the unpaid invoices of a business and charges a fee. Two forms of invoice financing allow you to access the money that is otherwise tied up in unpaid invoices: factoring and invoice discounting.

Business Finance Explained: Invoice Financing

What is Invoice Factoring?

Invoice factoring is when a finance company manages your invoices and collects the money themselves. Factoring is not usually confidential, so customers know that you have an invoice finance arrangement in place. With a factoring arrangement the finance company buys the debt that the customer owes. They forward a percentage of the cost of the invoice to you. They collect the balance when it is due and pass on the remaining money to you, minus fees and interest, depending on the arrangement.

What is Invoice Discounting?

A more common form of invoice financing is invoice discounting. This is a service offered by firms like and under this agreement the finance company lends you the money that is tied up in unpaid invoices. The percentage you receive of the invoice value is decided when you make the invoice financing arrangement. You will pay a fee for the service, which is also agreed upon at the start. You are responsible for collecting your own debts under this service, so customers will not realise you are using an invoice discounter.

What are the Advantages of Invoice Finance?

The main advantage of both forms of invoice finance is you gain access to money that would otherwise be tied up in invoices, and therefore you improve your cashflow. With invoice factoring you do not have to worry about chasing invoices, and can focus your time instead on other tasks and building your business. With invoice factoring you can also get help negotiating a better deal from suppliers, and better terms.

An invoice discounting arrangement is confidential, which benefits you when you don’t want customers to know that you are using the arrangement and borrowing money using unpaid invoices. You keep closer contact with your customers and retain control over their accounts.

Are There Disadvantages to Invoice Finance?

Invoice finance is not for everyone, and it is important to look at the process carefully before you decide. You will lose some of the money in your invoices as you need to pay a fee and interest, but it helps when you can free-up cash in order to develop the business. You normally have to issue invoices commercially, and not to the public; so it may not be possible to use the service if you are selling goods to the public. If you prefer to deal with your customers directly, be sure to choose the type of invoice finance arrangement that allows you to retain control of your invoices.