The Bionic 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 the very best solution for your business, 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.

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

  1. Invoice financing 
  2. Invoice factoring
  3. Invoice discounting

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 another lender) will allow your business to borrow money 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.

What is the difference between invoice financing, invoice factoring and invoice discounting?

Although all three products allow you to borrow against unpaid invoices, there are some differences, so it's important you choose the right one for your business. 

  • Invoice financing allows you to choose which invoices you want to borrow against and the lender will then offer you an amount you can borrow based on the value of those invoices. Your business deals with customers and takes repayments from them before repaying the lender. This means you don't need to let them know you're on an invoice financing plan.
  • Invoice factoring is usually only available on specific invoices from approved and creditworthy clients. The lender buys these invoices and 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. The big difference here though is that the lender takes payments directly from your customers on your behalf, so there's no confidentiality.
  • Invoice discounting usually involves you borrowing against all of your company's invoices as collateral against a loan. This means it's more like a more traditional type of loan, whereby a bank will lend money against an unpaid invoice. With this type of financing, you're still responsible for collecting payments from your customers - so there is some confidentiality - and you use any money you collect to repay the loan. 

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 to their customers. A bank - or another lender - will effectively ‘own’ the imported goods until the importer sells them to its customers. 

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.

Is invoice financing risky?

All types of lending come with a certain level of risk for both the lender and the borrower. As invoice financing is a short term measure to cover certain costs, the main risk for business owners is that they can become too dependent upon it. 

This can sometimes be the case if customers aren't paying invoices on time and you need to finance further invoices to keep up with costs. If this happens, you could also find that the cost of borrowing really starts to add up, so always be careful when taking out this or any type of credit.

If you take out invoice factoring, there is also a reputational risk as your customers may assume your business has had to take out credit because it's in financial difficulty. This is why it's always wise to speak to our tech-enabled team as they will be able to talk you through your options to help make sure you choose the one that's best for your business. 

Is invoice financing a good idea?

This all depends on the individual circumstances of your business and how long it will take you to repay the debt. Invoice financing should only be ever used as a short-term option. If you need a longer-term loan, it's worth considering other types of business finance, such as a secured business loan, or a business mortgage if you need money for a commercial property.

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 creditworthiness 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.

Click the 'Start a quote' button on the right to find out what type of business loan is best for you.