What are the different types of Invoice Finance?

There is often a feeling of reluctance from businesses when seeking Invoice Finance mainly because there are so many definitions and types available. This causes businesses to feel overwhelmed when looking at financing options.

However, at some stage, every owner-managed business will face an irritating wait for payment from slow-paying debtors and Invoice Finance can offer the best funding solution.

Simply put, Invoice Finance is the collective term for the types of invoice based lending available, such as Invoice Discounting and Invoice Factoring. It focuses on allowing business to access money from their unpaid invoices straight away, without having to wait for customers to pay.
 

Generally speaking, there are two main types of Invoice Finance available to businesses.

Invoice Factoring is by far the most popular form of Invoice Finance available to UK businesses. It involves an arrangement with your funder, whereby the lender takes responsibility for running your credit control process. They pursue the debtor for payment so that you don’t have to. This type of invoice finance allows you to draw up to 100% of the value of an invoice straight away so that you don’t have to wait 30, 60 or even 90+ days for your customers to pay.

Invoice Discounting is similar to Invoice Factoring in that you can access working capital as soon as you raise an invoice, however you are fully in charge of your own credit control.  Invoice Discounting is generally available to more established businesses with a proven track record of credit control.

Both Invoice Factoring and Invoice Discounting have many variants, in particular:

Disclosed – money is advanced to a company as it issues new invoices and your customers will be aware that an Invoice Finance lender is involved.

Recourse – the company sells invoices to a factor, with the promise that they will buy back any uncollected invoices. The lender will fund invoices for a pre-determined amount of days past its due date. There is a non-recourse variant, which means the lender is liable for the unpaid invoice.

CHOCs -this is short for ‘Client Handles Own Collection’ and sits somewhere between factoring and discounting. It is a disclosed factoring agreement where your business maintains full responsibility for credit control rather than passing it to the lender.

Confidential - this means you can access your funds as usual, but the facility is confidential so debtors are not informed that the arrangement is in place.

 

Why Invoice Finance might be for you:

  • You are able to gain access to money quickly and don’t have to wait for your customers to pay.
  • As you are receiving money at a faster rate, it allows for an improved and more reliable cash flow.
  • You are able to keep arrangements confidential, so customers are not aware that is in place.
  • Invoice Finance can support businesses that are experiencing challenging fluctuations.
  • It is often available to businesses that are unable to receive funding by traditional bank finance.
  • It can be useful for businesses that have a smaller number of clients who pay larger value invoices. In cases like this, late payment of a single customer can pose risk to the company.
  • With Invoice Discounting, it allows the business to retain control as, with discounting, the business is in charge of chasing invoices.
  • Invoice Finance is suitable for a wide range of industries. The most common industries that use Invoice Finance include construction, logistics, manufacturing, printing, recruitment, security and transport.

 

Things to consider:

Invoice Finance is a great external financing option for businesses, however, with all business prospects, it is important to consider all of the options available.
All businesses are different therefore your financing options might be different too. If you do choose to go for an Invoice Finance option, make sure you research which form will be best for your business. Most lenders will be more than happy to advise you on the most appropriate option for you.


You can find out more information about our Invoice Finance products below: