Can Invoice Finance Help Your Manage Your Cash Flow?


As bank lending to businesses large and small continues to decline in both the US and UK, many businesses are looking for alternative funding sources to plug the gaps in their cash flow.

Invoice finance is one such alternative – but is it right for your company? In this post I’ll explain exactly what invoice finance is and what the pros and cons are.

What is Invoice Finance?

When your customers insist on 30, 60 or even 90 day invoices or when they pay late for the goods or services they’ve received, it’s not only frustrating but it can cause serious problems for your company’s liquidity.

Gaps in cash flow caused by late payments can lead you falling short of meeting your own financial obligations to suppliers and staff or going overdrawn at the bank and incurring additional charges. Click here to read in-depth articles about finance management and investment as well.

An invoice finance company will release cash up front for your unpaid invoices. In essence it’s a way of borrowing money using those invoices as collateral. When the invoices are paid, you repay the loan plus a fee charged by the invoice finance provider.

There are two distinct types of invoice finance: invoice factoring and invoice discounting.

Invoice Factoring

With this method of invoice finance, a company will pay up front for your invoices on the condition that they take over the process of collecting payment. You’ll get up to 90% of the face-value of your invoices advanced, pay 1.5% to 3% over the base rate in interest until payment is collected and fees of around 1% – 2.5%

Invoice Discounting

With invoice discounting you retain control of your collection processes. You won’t be able to draw down as much of the invoice value as a loan with this method but you’ll pay lower fees (around 0.5%).

The Pros and Cons of Invoice Finance


  • Improved Cash Flow Management

Once you have a company who’ll lend against your invoices you’ll always know when you’re getting paid – almost immediately after generating the invoice. This can greatly aid your cash flow forecasting and planning and prevent you incurring penalties for using your overdraft facility.

  • More Available than Bank Loans

Unless you’re prepared to put up part of your business as collateral and take out a secured loan, bank loans are hard to come by. Invoice finance requires only that you post unpaid invoices as collateral which makes the risk very low. And, while slightly more expensive than a secured bank loan, it’s still cheaper than an unsecured loan.

  • Outsource your Credit Control

With invoice factoring credit control is taken out of your hands. This frees up your key staff for business critical activities rather than chasing payments.

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  • Potential Hidden Charges

If you’re considering invoice finance then keep an eye out for any charges hidden in agreements. These can include fixed charges for late paying customers, a large jump in interest rates after customers have gone over the agreed payment schedule or penalties for defaulting customers.

You’ll still have to pay back any money that was borrowed against invoices from customers who later default – unless you opt for non-recourse factoring. This involves an additional charge of 2% and involves the finance company credit checking all your customers before agreeing to lend against their debt.

In conclusion, invoice factoring can be a very convenient form of financing that’s much more flexible than a bank loan – since you only borrow against what you know you have coming in.

However, invoice finance, like any other form of financing requires careful consideration and careful management. Make sure you’ve done a thorough forecast of your revenue and work out the fees you can expect to pay in advance before you make a decision. If you want to know more about business management and financial abilities, check out this website: