Invoice Finance: Practical Insights



Invoice  finance  is a great way to improve cash flow and fund working capital. However in order to determine if it’s the right  finance  for your business there are a number of questions to be asked and facts to be considered.

There is wide range of specialist lenders in the invoice  finance  market all with facilities offering a variety of terms and conditions, so it’s important to fully understand the differences.

Two Main Invoice  Finance  Products

There are two main invoice  finance  products in the form of invoice factoring and invoice discounting. They work on a similar basis in that funds are advanced against a company’s outstanding sales invoices, generally up to the value of 90 per cent. Both products require the borrower to be a business which sells to other businesses on credit.

The lender takes their security over the asset value of the sales ledger.

Invoice factoring is a fully disclosed service where the borrowers customers will be aware that the facility is in place and the will in fact make their payments to the lender. The lender will advance immediate funds on production of the sales invoice and pay the balance of invoice value less their fees when the customer eventually pays.

With invoice factoring it is normal for the lender to undertake ledger management and credit control.

Invoice discounting is classed as a confidential facility as the borrowers customers are not made aware that the facility is in place. Effectively the lender advances funds against the total outstanding sales invoices on the debtors ledger with movements on the funding account being controlled between the borrower and the lender.

With invoice discounting the borrower would normally retain full control of their ledger including debt management and credit control.

Key Information

The two main questions most borrowers have when enquiring about invoice  finance  facilities is how much they can borrow and how much it will cost.

1. How much can be borrowed?

Although there are instances of lenders and brokers stating borrowing of up to 95 per cent of sales value it generally does not exceed 90 per cent. It can often be lower as the lender will assess the risk in the debtors book based on the number of customers, spread of outstanding amounts and credit ratings.

2. How much will it cost?

There are generally two main costs involved: a service charge for the cost of running and managing the account and an interest charge applied to the amount advanced. There can be other costs such as set up fees and document fees which should always be confirmed in advance.

Other Important Information

It’s important to clarify all the key aspects to the funding facility and take time to fully read and understand them taking appropriate advice at all times. Here are some additional points of importance:

1. Contract length

What is the term of the agreement and the notice period? Longer period terms will generally provide a better financial deal but flexibility may be more important.

2. Financial guarantees

Be clear on the full implications of any company or personal guarantees you have been asked to provide. It is always advisable to seek independent legal advice in these areas.

3. Termination clauses

It’s important to know timescales, procedures and costs of termination as these can vary significantly amongst lenders.

4. Terms of operation

Be clear what these are as you will have to comply with them and contravention can be costly.


In summary our advice is that whilst invoice  finance  is a very effective method of funding working capital, it’s important because of the variety of lenders, products and terms and conditions to take the time to ensure the facility meets your requirements and know the detail of what you’re signing up to.

Source by George D Scott

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