How invoice finance works – Is it right for your business?

For many businesses, cash flow is the biggest challenge. They have done the work, sent the invoice, but are waiting 30, 60 or even 90 days to get paid. This gap between work delivered and money received can hold a company back from paying suppliers, covering payroll or taking on new opportunities.

This is where invoice finance can help. It allows a business to unlock the value tied up in unpaid invoices and turn it into immediate working capital.

Here’s how it works:

An invoice is raised as normal, but instead of waiting for the customer to pay, the business shares that invoice with an invoice finance provider. They advance a percentage of the invoice value, typically 80 to 90%, within 24 to 48 hours. When the customer eventually pays, the finance provider sends the business the remaining balance, minus their fees.

In simple terms:

• Invoice finance means a faster cash flow. A company gets paid most of the value of their invoices almost immediately, rather than waiting weeks or months.
• It’s not a loan. A business is not taking on extra debt, they are simply accelerating access to money which they have already earned.

There are two main types of invoice finance:

• Invoice factoring – The finance provider manages the sales ledger and credit control, chasing payments directly from the end customers.
• Invoice discounting – The business remains responsible for collecting payments, so their customers may never know that they are using invoice finance.

Invoice finance can be a good fit if:

• The business offers goods or services on credit terms.
• The business has a reliable customer base and predictable invoice flow.
• The business wants to improve cash flow to support growth, pay suppliers on time, or take on new contracts.

However, it may not be suitable if the business has very low invoice volumes, highly unpredictable customers, or need funding for long-term investments rather than working capital.

When considering an application firstly a business should review its cash flow needs, compare providers and understand the fees involved. Typically, the fees will consist of a service charge plus a small percentage of the invoice value. The company should be clear on whether they want customers to know they are using invoice finance (factoring) or prefer a confidential arrangement (discounting).

Finally, invoice finance is a powerful tool to smooth cash flow and fund growth, but it should fit into a wider funding strategy. Used wisely, it can free up working capital and give breathing room to focus on running and most importantly growing the business.

NGI has recently helped an established London-based recruitment business, specialising in permanent placements and executive search. They were looking to expand its international operations, with a particular focus on the Middle East. The business was using invoice discounting through a UK high street bank but faced significant constraints: funding levels were capped due to the high proportion of permanent placement work, the debtor ledger could only be operated in GBP, resulting in additional foreign exchange costs and export funding was restricted to just 20% of the outstanding debtor ledger. To support the client’s growth plans, we were tasked with sourcing a provider that could offer multi-currency ledgers and a higher cap on export funding. After approaching several invoice discounting providers from our panel, we presented the client with three suitable offers. The chosen provider delivered a facility with no cap on export funding, no restrictions related to permanent placements or executive search trade debts and the ability to operate ledgers in GBP, USD, and EUR which directly supported the client’s international growth strategy.

To find out more about Invoice Finance why not arrange a call with one of our business finance specialists. Call us on 01993 706403 or e-mail enquiries@ngifinance.co.uk.