What Is Invoice Financing?
Invoice financing is a way for businesses to improve cash flow by borrowing money against unpaid invoices. Instead of waiting 30, 60, or 90 days for customers to pay, businesses can access a percentage of the invoice value immediately from a lender.
How Does Invoice Financing Work?
- Business Issues an Invoice – A company sells goods/services and invoices the customer.
- Apply for Invoice Financing – The company sends the invoice to a finance provider.
- Receive an Advance – The lender advances a percentage of the invoice value (typically 70%-90%).
- Customer Pays the Invoice – When the customer eventually pays, the lender releases the remaining balance minus fees and interest.
Example of How Invoice Financing Works (With Figures)
A construction firm completes a job and issues a £50,000 invoice with 60-day payment terms. They need cash immediately to cover wages and materials, so they use invoice financing.
£50,000 x 80% = £40,000 advanced upfront.
Full £50,000 is received by the finance company.
The lender charges a 3% service fee: £50,000 x 3% = £1,500
The lender charges 1% interest per month for two months: £50,000 x 1% x 2 = £1,000
Total cost = £1,500 + £1,000 = £2,500
Remaining balance released: £10,000 – £2,500 = £7,500
Final Summary:
Business gets £40,000 upfront
After customer pays, they receive £7,500
Total cost of financing = £2,500 (5% of invoice value)
Pros & Cons of Invoice Financing
| Pros | Cons |
|---|---|
| Improves Cash Flow – No need to wait months for payment. | Costs & Fees Interest rates and service fees can reduce profits and can be quite high. |
| Quick Access to Funds – Usually within 24-48 hours. | Not Suitable for All Businesses, only works if the business has outstanding invoices. |
| No Collateral Required – Uses invoices as security, unlike traditional loans. | Risk of Customer Non-Payment, some lenders require the business to cover unpaid invoices. |
| Scales With Business Growth – More invoices = more available funding. | Potential Impact on Customer Relationships, some clients may prefer to deal directly with the business rather than a finance company. |
Industries That Commonly Use Invoice Financing
- Construction – Long payment terms for subcontractors and suppliers.
- Manufacturing – High production costs before receiving payments.
- Recruitment Agencies – Pay staff weekly but clients settle invoices in 30-90 days.
- Transport & Logistics – Fuel and driver costs must be covered before clients pay.
- Wholesale & Distribution – Buying stock in bulk before customers pay.