Offering customers credit can help a business remain competitive, but it also creates a timing problem. Work may be completed today while payment does not arrive for another 30, 60 or even 90 days. During that period, wages, suppliers, rent and other operating expenses continue to fall due.
Invoice finance is one option businesses can consider when a substantial proportion of their working capital is tied up in unpaid customer invoices. However, the structure, cost and responsibilities associated with a facility should be understood before an agreement is signed.
What Does Invoice Finance Actually Do?
Invoice finance allows an eligible business to access part of the value of its outstanding invoices before customers pay them.
Instead of waiting for the full credit period to pass, the company submits eligible invoices to the finance provider and can draw an agreed proportion of their value. Once the customer pays, the remaining balance is dealt with according to the facility terms and applicable fees.
Pulse Finance states that its invoice finance product can provide up to 90% of the value of eligible outstanding invoices, with the remaining value paid after the customer settles the invoice and fees are deducted.
Actual advance rates, charges and eligibility will depend on the provider and individual agreement.
Factoring and Invoice Discounting Are Not Identical
Business owners will often come across two common forms of invoice finance: factoring and invoice discounting.
With factoring, the finance provider can take responsibility for managing the sales ledger and collecting customer payments. This may appeal to companies that want both funding and support with credit control.
Invoice discounting generally allows the business to retain responsibility for collecting its invoices while using the debtor book to support its working capital facility. Pulse Finance also distinguishes between factoring-style invoice finance and invoice discounting in its information for businesses.
The right structure depends partly on whether the company wants to retain direct control over customer collections.
When Can Invoice Finance Be Useful?
Different invoice finance solutions may be worth considering where a company makes regular business-to-business sales on credit and experiences a significant delay between issuing invoices and receiving payment.
Consider a recruitment firm that pays temporary workers every week but invoices corporate customers on 30-day terms. Payroll cannot simply be delayed until customers settle their invoices. The company therefore needs enough working capital to cover that gap.
Similar situations can occur in:
- Manufacturing
- Transport and logistics
- Recruitment
- Wholesale
- Security services
- Other B2B industries using credit terms
Invoice finance will not suit every company, so eligibility and commercial terms need to be reviewed before treating it as a solution.
Compare More Than the Advance Percentage
A provider advertising a high advance rate may initially appear to offer the strongest facility, but the headline percentage does not provide the complete picture.
Businesses should ask several questions before making a decision.
How are service fees calculated? Are there minimum charges? What happens if an invoice becomes overdue? Are some customers or invoices excluded from funding? Does the facility require a personal guarantee? Can the available funding grow as sales increase?
Understanding these details can make comparisons between providers much more meaningful.
The company should also calculate how much funding is realistically expected to be available after any restrictions, reserves or ineligible invoices are taken into account.
Consider How Customer Relationships Will Be Managed
Another important issue is communication with customers.
Where the provider handles collections, its credit-control approach may become visible to the company’s customers. Businesses should understand how calls, emails and payment reminders will be handled and whether the approach is consistent with their own customer-service standards.
Companies choosing invoice discounting may retain more responsibility for collection activity, but they will also need sufficient internal resources to manage the sales ledger efficiently.
Neither approach is automatically better. It depends on the company’s staffing, customer relationships and preference for control.
What Role Can a Broker or Introducer Play?
The invoice finance market includes different providers, products and facility structures, which can make direct comparison difficult for a business unfamiliar with the sector.
Professional advisers and invoice finance brokers may introduce businesses to potential funders based on factors such as turnover, sector, debtor profile and the amount of working capital required.
Businesses using an intermediary should understand how that intermediary is compensated, whether it works with a broad panel of funders and whether any commission or commercial relationship could affect the recommendations provided.
Being aware of these arrangements helps maintain transparency throughout the funding process.
Review the Facility as the Business Changes
A finance facility that works well today may need to be reconsidered as turnover, customer concentration or payment patterns change.
Management should periodically review available funding, utilisation, fees and the service received. Growing businesses should also check whether the facility can expand with sales rather than becoming a constraint.
Regular reviews can identify issues early and help ensure funding continues to reflect actual working-capital requirements.
Conclusion
Invoice finance can help eligible B2B businesses bridge the timing gap between raising invoices and receiving customer payments, but choosing a facility requires more than comparing headline advance rates.
Businesses should understand the differences between factoring and invoice discounting, examine the complete fee structure, consider how customer collections will be handled and review all contractual obligations carefully.
The most appropriate finance arrangement is one that fits the company’s trading cycle, cash flow requirements and ability to manage its debtor book rather than simply providing the largest advertised funding figure.