How invoice finance works

Key points

• Invoice finance gives you part of an invoice's value now, before your customer pays.
• The two main types are often called factoring and discounting.
• The provider sets the advance percentage and the fees. Both vary.
• A key difference is who collects payment from your customers.

The basic idea

You do the work and send an invoice. Your customer has, say, 30 or 60 days to pay. With invoice finance, a provider gives you part of that invoice value now. When your customer pays, the provider passes on the rest to you, less its fees.

It is a way of getting cash sooner from sales you have already made. It is not free money: you pay for the speed.

How it works, step by step

1. You deliver goods or services and invoice your business customer as usual.
2. You share the invoice with the invoice finance provider.
3. The provider advances a percentage of the invoice value to you.
4. Your customer pays the invoice, either to you or to the provider, depending on the setup.
5. The provider pays you the balance, less its fees and charges.

Factoring and discounting

Providers use different names, but there are two common setups.

Factoring

With factoring, the provider usually manages your sales ledger and collects payment from your customers. Your customers know a provider is involved, because they pay the provider. This can save you time chasing payments, but you hand over some of the customer contact.

Discounting

With invoice discounting, you usually keep collecting payments yourself. In many cases your customers do not know a provider is involved. Providers often expect stronger bookkeeping and controls for this type, because you stay in charge of collections.

Whole ledger or single invoice

Some providers fund all your invoices together. Others let you choose single invoices. The choice can affect cost and flexibility.

The advance

The advance is the share of the invoice you get upfront. The provider sets the percentage based on things like your industry, your customers and how reliably they pay. The rest is held back until your customer pays.

Ask what percentage applies to you, in writing, and whether it can change.

The fees

Invoice finance pricing can look different from a normal loan. Common charges include:

• a service or administration fee, often a percentage of invoices or a set amount
• a discount or interest charge for the time the money is advanced
• setup fees, and sometimes fees to end the agreement
• extra charges if a customer pays late or does not pay

The invoice finance calculator uses the advance and fee from your own quote to show the cash now, the cash later and the cost. Our guide Understanding loan fees explains what to ask for in writing.

Who carries the risk if a customer does not pay?

This depends on the agreement. In some setups, you have to repay the advance if your customer does not pay. In others, the provider takes on some of that risk, usually for a higher fee. Check this carefully, because it matters a lot if a big customer has trouble.

Is it a fit?

Invoice finance tends to be used by businesses that sell to other businesses on payment terms. It may be less suitable if you sell mostly to the public, or if your invoices are often disputed.

The invoice ageing helper shows how much is owed to you and how old it is. Read Invoice finance or a business overdraft? to compare it with another common option.

Questions to ask a provider

• What percentage will you advance, and on which invoices?
• What are all the fees, and how are they worked out?
• Who collects from my customers, and will they know?
• What happens if a customer pays late or does not pay?
• Is there a minimum term, and what does it cost to leave?