A guide to invoice financing

Small businesses often need a bit of financial help, either to get started or to overcome bumps in the road as they grow. In either case, business financing could be an option.

There are a few different types of business finance options, from a straightforward bank loan to a more bespoke arrangement, like invoice financing. At Bionic, we understand that your business is unique and has unique needs. That’s why our team of experts is on hand to help you find you the very best deals available, so you can concentrate on what you do best.

What is invoice financing?

Invoice financing is a way that small businesses can maintain cashflow while waiting for customers to pay for goods or services. Although there are several different ways that invoice financing works, in simple terms it’s borrowing against the value of unpaid invoices. A third party - often a bank - will, in effect, buy up your invoices so that you can access the money you are owed quicker. The bank will pay a percentage of the invoice upfront, with the rest settled once the customer has paid for the goods or services your business provided.

This type of financing can be helpful as it allows you to pay your employees and suppliers, or to reinvest and grow your business, without having to chase overdue payments from customers. It’s often used by businesses that could otherwise run into short-term cashflow difficulties.

How does invoice financing work?

Invoice financing works in the same way as many other financing products. A bank (or other lender) will lend money to your business up to the value of an invoice or a number of invoices that you send to your customers. This invoice loan will be offered in return for a fee, which is calculated as a proportion of the value of the invoice or invoices.

There are two main types of invoice financing typically available to UK businesses:

  • Invoice factoring - Also known as debt factoring, this is when a business sells its unpaid invoices to a bank or other lender. Technically, this is not a loan, as the financier buys the invoice or invoices and then immediately pays a proportion of the value of the invoice - typically around 85% - with the rest paid once it collects the invoice payment from the original customer. In return, the ‘lender’ will charge an invoice financing fee and/or interest to your business.
  • Invoice discounting - This is a more traditional type of loan, whereby a bank will lend money against an unpaid invoice. With this type of financing, you would still be responsible for collecting payment from your customer, and then would use that money to repay the loan. As with factoring, the lender will charge either interest or fees for this service.

Is your business eligible for invoice financing?

Although different lenders have different lending criteria, if your business meets the following conditions, there’s a chance it will be eligible for invoice financing:

  • It’s set up as a limited company or LLP.
  • Has a turnover of at least £50,000.
  • Is actively trading with other businesses and offering standard credit terms.

That said, some lenders will insist on a business having a minimum number or value of invoices per month before they enter into a financing agreement, so it may be worth making sure you are likely to be using invoice financing regularly before going down this route.

What is import invoice financing?

Import invoice financing is slightly different from the standard forms of invoice financing described above.

Import invoice financing can be used by businesses that import goods to sell on to its customers. A bank - or other lender - will effectively ‘own’ the imported good until the importer sells them on to its customer. 

The cost of importing, and the delay between paying for those goods yourself and receiving payment from a customer, can be offset through this arrangement, helping businesses that rely on imports maintain a reliable cash flow.

What is invoice trading?

Invoice trading is another variation on invoice financing, available to UK businesses. It is similar to invoice factoring, in that a business sells its invoices to a third party, which is then responsible for collecting payment. The difference is that invoice trading is done on a peer-to-peer basis, meaning a business can sell its invoice to any investor via an online auction, cutting out traditional lenders such as banks.

Invoice trading is used by businesses looking to ease short-term cash flow issues, who match with investors happy to take on the risk of chasing invoices in exchange for a good short-term return. 

What are the pros and cons of invoice financing?

Invoice financing is a great way for a business to maintain smooth cash flow by removing the need to wait for customers to pay before you can access funds. If you choose to use invoice factoring, it can also save you time and resources chasing payment, as the responsibility is passed on to your lender.

Many businesses also appreciate the flexibility of invoice financing, as they can scale up or down how much they use it, depending on their agreements with lenders. For small businesses looking to invest and grow, such flexibility can prove invaluable.

The main disadvantage to invoice financing is that it will cost you. All lenders will charge either a fee or interest, or even both. While access to cash may be more important to your business, it is important to understand that you will not receive 100% of the value of your goods or services if you use invoice financing. In addition, some businesses may find it harder to access other forms of financing if they use invoice financing.

What are the alternatives to invoice financing?

There are a number of alternatives to invoice financing, such as traditional bank loans, asset based finance, asset leasing or bridge loans, and your eligibility for any of these options will depend on the size and credit worthiness of your business. If you choose another type of financing option, some lenders may require you to put up more of your assets as security and might also tie you into longer-term arrangements.

How to get invoice financing with Bionic

At Bionic, we know that every business is different and has different needs. That’s why we start every relationship with a phone call with one of our financing experts to understand what the right solution might be for you.

If invoicing financing is the right option, we will use our smart technology to assess hundreds of potential UK lenders and get the best possible deal.

We will tell you what documentation is required from you, including your business name and postcode, to get the application process underway as quickly and smoothly as possible.

You will be able to monitor your application, so nothing happens without you knowing. But we will still handle all the admin once the application is approved so that you can receive your funds when you need them and start growing your business.

Enter your postcode below to find out if an invoice financing deal is the right option to your business.