nigel woollsey

Nigel Woollsey

Online Writer
Published: 12/03/2019

At a glance

  • Invoice finance (either invoice discounting or factoring) is where you sell your invoices to a finance provider who, in return, advances you a percentage of the value of those invoices – typically 85% to 90%.
  • The invoice finance provider also manages and arranges for collection of the invoices.

Invoice finance - Is it right for your business?

Factoring and invoice discounting are two types of business finance that allow you to unlock the cash in your unpaid invoices so that you can pay your own suppliers, invoices and staff, and could be the ideal funding solution for some businesses.

Can I keep factoring a secret from customers?

Some factoring providers will offer a 'confidential factoring' service whereby your customers don't know that your business has sold its invoices to a third party.

Bad debt cover

You may be able to get 'bad debt' protection included as part of the factoring agreement, although this will be more expensive than having no protection. The different options are:

  • Recourse factoring

This type of factoring means you get no bad debt protection. If a customer pays too late, or not at all, you must pay back the money you have been advanced in full, together with any fees and interest.

  • Non-recourse factoring

Non-recourse factoring means that the factoring company shoulders the risk of bad debt. You don't need to pay back any money if a customer doesn't pay. This option is normally a bit more expensive than recourse factoring.

Invoice discounting: an alternative to factoring

If you'd rather retain control over the management of your invoices, invoice discounting can offer a real alternative as your business maintains control of its own sales ledger.

Invoice discounting is much the same as factoring: there are confidential options as well as recourse or non-recourse alternatives. However, invoice discounting is normally only available to established companies (although some may consider start-ups) and the minimum turnover requirements are usually higher, typically at least £500,000.

Will my business be eligible for invoice finance?

Invoice finance is for businesses whose customers are other businesses – retailers will not usually be considered by providers.

Increasingly, providers are prepared to consider start-up businesses. However, some may impose a minimum turnover, which can be anything from £50,000 upwards.

To be an attractive business for a factoring or invoice discounting provider, you should not be over-reliant on a single customer and should have a spread of invoices.

The invoice finance provider will normally look at your invoice book and may decline particular invoices (or your entire application) if you have several customers who are more than 90 days overdue.

Pros and Cons

  • Some customers may pay more promptly to a third party.
  • It unlocks capital quickly – you can draw money as soon as you have invoiced a customer.
  • If cashflow isn't an issue it can be a cost-effective method of reducing your overheads.
  • If you choose non-recourse factoring, your business is protected if a customer is very late in paying – or doesn't pay at all.
  • Some customers may prefer to deal with you and not a third party.
  • You don't collect your invoices, so how the factoring provider treats your customers will affect your future business.
  • You don't get the full value of your invoice, which means reduced profitability.
  • If you choose recourse factoring, your business is still liable if your customers don't pay within a set timeframe (usually 120 days).
  • It can be difficult to end a factoring agreement. You may have to give notice of up to three months, and all monies must be paid back to the factoring provider before your business is released from the agreement.

Moneyfacts tip

Moneyfacts tip nigel woollsey

You should only consider factoring or invoice discounting an option if you have few invoice disputes and have customers who pay reasonably promptly (within 90 days).

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

calculator on top of financial documents

At a glance

  • Invoice finance (either invoice discounting or factoring) is where you sell your invoices to a finance provider who, in return, advances you a percentage of the value of those invoices – typically 85% to 90%.
  • The invoice finance provider also manages and arranges for collection of the invoices.

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