Understanding Invoice finance

What is it?

Invoice finance, is as the name says on the tin, finance raised against your outstanding invoices. It is in essence a form of secured funding, it just happens to be secured against your outstanding invoices. There are various ways of doing it, but in loose terms they all work in the same way.

You raise an invoice

You send it to your funding provider

Your funding provider makes an amount of that invoice available (usually around 85%)

When the invoice is settled you can have the balance, less a pre-agreed service charge.

The legal bit they don’t tell you (but isn’t really that bad)

Any Invoice Finance provider will register a debenture against your company (a mortgage on the company as it appears on Companies House).

This is to make sure you don’t draw down a large sum of money and then Liquidate your company from underneath them so they can get it back again.

Basically the debenture means that if you need to pursue any form of Insolvency action (a CVA, Liquidation or Administration) your finance provider has to be involved, and will have first call on the outstanding invoices (they did lend the money against it after all).

Depending on your situation, and the type of Invoice Finance you want, a typical contract can run anywhere between 30 days to 2 years. At the end of the agreement you have option to leave without penalty.

If you decide to leave before the end of the agreement, there may be a financial penalty to pay as they are going to lose out on their investment, the details of this will be in your contract.

Costs for Invoice Finance

Invoice Finance costs money, as any form of commercial lending will do. Typically the service charge (as the cost is generally called) will depend on three things:

Your turnover

Your history of financial management

Your clients history of payments

The two most important things here are your turnover (the higher the turnover the less percentage you will pay) and your clients payment history (in effect the finance is secured against their ability to pay).

Typically the cost will run between 0.5% and 5% of your turnover.