Understanding Invoice Finance

Invoice finance allows businesses to use their unpaid invoices as collateral to access funding, bridging the gap between issuing invoices and receiving payment. Instead of waiting weeks or even months for customers to pay, invoice finance can provide a percentage of the invoice value—often up to 90%—within as little as 24 hours.

When your customer eventually pays, the lender forwards the remaining balance after deducting their fees. This solution is particularly useful for businesses needing immediate cash flow but lacking physical assets to offer as loan security.

How Does Invoice Finance Work?

1. Invoice Issued: You provide invoices to your customers with standard payment terms (e.g., 30–90 days).
2. Debt Purchased: After setting up an invoice finance facility, the lender effectively buys the unpaid invoice debt.
3. Advance Payment: The lender advances you a percentage of the invoice value, often up to 90%, within a short time.
4. Customer Payment: Your customer pays the invoice, usually into an account managed by the lender.
5. Final Payment: The lender releases the remaining balance minus their fees.

Example of Invoice Finance in Action

ABC Logistics Ltd needs funds for a new project but is waiting on a £10,000 invoice. Using invoice finance, they receive 85% of the invoice value (£8,500) upfront. Once the customer pays, they get the remaining £1500 minus a 3% fee (£450).

Types of Invoice Finance

1. Invoice Factoring: The lender manages your credit control and collects payments directly from customers. This saves time but informs customers you’re using invoice finance.
2. Invoice Discounting: You retain control over invoice collections, and customers may not know you’re using invoice finance.
3. Selective Invoice Finance: Choose specific invoices or accounts to finance without committing to a full-facility agreement.

Pros of Invoice Finance

• Asset-Free Security: No need to provide additional collateral; invoices serve as security.
• Quick Access to Cash: Funding is often available within 24 hours.
• Scalable Solution: Funding grows with your business turnover.
• Saves Time: Factoring services manage collections, freeing you to focus on growth.

Cons of Invoice Finance

• Customer Dependence: You may face accountability if customers fail to pay.
• Fees Apply: Lenders charge service and interest fees.
• Potential Confidentiality Concerns: With factoring, customers know the lender is involved.

Who is Eligible for Invoice Finance?

Lenders typically look for:

• B2B Businesses: Invoice finance primarily supports businesses trading with other businesses.
• Trading History: You need a proven record of invoicing customers.
• Reliable Payment Habits: Customers should pay within 30–90 days.

Start Your Invoice Finance Journey

Invoice finance is a flexible, fast, and scalable way to boost cash flow and seize growth opportunities. At Principal Business Finance, we help businesses access tailored invoice finance solutions that fit their unique needs. Contact us today on 01604217998 or Info@principalbusinessfinance.co.uk to learn how we can empower your business to thrive.