Using unpaid invoices to raise cash (invoice finance)

If your business has outstanding invoices that might not be paid for a while, you can take out a loan to get some of the money upfront.

This is called 'invoice finance' and is a type of 'asset-based lending'. It can be used for invoices that will be paid in the next 30 to 90 days.

The main advantages are:

• quick and easy access to cash flow
• you can predict your cash flow more accurately and plan ahead
• the amount of money you can get grows with your business

The lender is sometimes referred to as an 'invoice financier' and can be a bank or a specialised lender.

The lender will pay your business between 75% and 90% of the invoice's value upfront.

Using invoice finance

Invoice finance is mainly for businesses that:

• sell to other businesses
• have a lot of invoices
• have a good credit history
• have good procedures to make sure invoices are paid (credit control)
• are established and profitable
• have audited accounts

What lenders check

Before lending any money, lenders will check if your business is suitable for invoice finance.

They will check:

• your credit history
• your customers' credit history
• the type of invoices your business uses (for example invoices for long term contracts)
• your procedures to make sure invoices are paid (credit control)

Lenders will also want to see your business plan.

Who can't use invoice finance

You can't use invoice finance if you sell directly to the public or export to certain countries.

You can't normally use invoice finance if you only have a small number of customers. There can be exceptions to this, for example if you have one large customer the lender feels is reliable.

Other ways of funding your business

If you don't have a lot of invoices, you might want to consider other ways of funding your business, such as:

• selling shares (equity finance)
• borrowing against something you own or plan to buy (asset finance)
• crowdfunding or peer-to-peer lending
• getting a temporary overdraft on your bank account

Types of invoice finance

The 2 main types of invoice finance are factoring and confidential invoice discounting.

Factoring

With factoring, the lender will:

1. Buy the debt owed to you by your customer.
2. Pay you a percentage of the debt up front (usually between 75% and 90%).
3. Collect the full amount from your customer.
4. Give you the remaining balance – less interest and fees.

Factoring is less confidential because the lender collects the full value of the invoice from your customers and chases payments if necessary.

This means your customers will know you're using invoice finance.

Confidential invoice discounting

Confidential invoice discounting works as follows:

1. The lender pays you a percentage of your customer's debt up front (usually between 75% and 90%).
2. You collect the full amount from your customer.
3. You pay the loan back, as well as interest and fees.

With confidential invoice discounting, your customers won't know you're using invoice finance because you collect money from your customers yourself.

Choosing a lender

Invoice finance is provided by banks and specialised lenders. It's worth checking with your bank first, to see if they can offer your business invoice finance.

When choosing any lender you should:

• check they are reputable
• find out what interest and fees they charge
• compare quotes from different lenders

Further help

You can use the Better Business Finance website to search for lenders.

You can also find general help and advice for businesses on the:

• Find Business Support website
• British Business Bank website