Invoice finance explained

June 15, 2020
Invoice finance explained

What is invoice finance?

If your business has revenue tied up in unpaid invoices and struggles with short term cashflow concerns, you can advance cash from your unpaid invoices using invoice finance.  

With clients taking up to 90-days to pay their debts, invoice finance is a good way to ensure you have enough cash to pay suppliers and invest in growing your business.

What are the different types of invoice finance?

The three main types of invoice finance are factoring, discounting and single invoice finance (sometimes known as selective invoice finance or spot factoring).  

Invoice factoring is where a lender effectively buys an invoice from your business. Once the invoice has been factored, it is up to the lender to collect payment from your customers. Customers will be made aware when you use invoice factoring, because they will have direct communication with your lender.  

Invoice discounting is similar to factoring, but it’s up to you as a business to chase your customers for payment. If you don’t want your customers to know that you are using invoice finance, invoice discounting could be the best option for you.  

With traditional invoice factoring and discounting, a lender will require you to finance your full sales ledger for a set amount of time. With single invoice finance, you can select which invoices you want to finance on a case-by-case basis with no long-term commitment. 

Invoice finance case study 

A digital agency has more work than the current staff members can handle.

The agency owner has just won an important new contract and knows she needs to invest in extra staff and equipment to complete the job.

But with clients taking up to three months to pay their invoices, she doesn’t have the funds to cover the costs.  

The owner decides to finance an invoice worth £10,000 using a single invoice finance facility.  

She receives an advance of 85% at an interest rate of 2% per month. She uses the £8,500 to buy equipment for a newly hired digital designer who will work on the new contract.

At the end of the month, her client pays her the £10,000 she is owed, she repays the lender £8,500 plus the £170 interest fee and keeps the remaining £1,330.

In this case, the agency owner was able to use single invoice finance to fund new business and scale her company.

What is bad debt protection?

There is always a slim chance that your customers will become insolvent and unable to pay their bills, leading to bad debt (debt that is written off).  

If, despite credit checks, you have concerns about running into bad debt, you can choose to take out bad debt protection as part of your invoice finance facility.

With bad debt protection, you will get paid even if your customer becomes insolvent, limiting the risk to you.

Risk insight

Before proceeding with invoice finance, it’s a good idea to run credit checks on your customers to ensure there is little risk of them paying you late (or not paying at all).  

A lender will also run checks and approve your invoices based on their own criteria.  Once a lender has approved an invoice for finance, they will advance you a percentage of its value (usually between 70 - 85%). You will receive the money in the bank and can use it to cover cashflow gaps or fund a new project.

Lenders will charge interest on the amount advanced then, once your client pays their invoice, the lender will collect the money owed to them plus the interest fees and you will keep the remainder.

Is invoice finance right for me?

Choosing to take on finance can feel like a big step for some businesses. But, done correctly, it can become an important part of your cashflow management.  

If you’re looking for a one-off cash injection to cover an unexpected bill or fund a new project, single invoice finance provides a fast and flexible solution and won't necessarily require a personal guarantee or debenture.

If you’d like to learn more about invoice finance and Satago’s other cash management solutions, you can click here to book a demo with our team.

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