What is invoice finance?

Invoice finance is a service in which invoice finance lenders purchase unpaid invoices from businesses who need an advance on their payments. This finance facility gives businesses instant access to funds and reduces potential cash flow issues in exchange for an invoice financing fee.

Simply put, invoice financing is a way to turn your unpaid invoices into cash. Instead of waiting weeks or even months to get paid, you receive up to 100% of your invoice value upfront.

You get the money you need to cover your expenses and let the lender chase up your payments in the meantime. Once the invoice is paid in full, the lender will release any remaining payments to you.

It’s quick, efficient, and hassle-free; giving you the capital and time you need to focus on growing your business.


How does invoice financing work?

Your individual debtors or entire sales ledger are reviewed and, once approved, any outstanding invoices are factored by the lender.

In a matter of days, up to 100% of your invoice receivables will be sitting in your bank account ready to be used. You can use this capital to pay your contractors, employees, purchase more stock or complete your project.

Depending on the type of invoice financing you choose (factoring or discounting), the invoice finance company takes on the burden of chasing your unpaid invoices (factoring) or your credit and collections team takes over the responsibility (discounting).


Why do businesses use invoice finance?

Business owners turn to invoice financing because billions of pounds are tied up in unpaid or late invoices every year, a figure that is growing exponentially. This can be an issue for many businesses that rely on a steady cash flow to operate.

Invoice financing is a faster and more flexible way of plugging the cash flow gap in a business. It’s a suitable option for small, medium, and large enterprises. It encourages businesses to sustain their development and grow even larger.


How much does invoice financing cost?

Typically, invoice factoring is made up of a single service fee that is deducted from the outstanding invoice.

In this instance, the lender is also in charge of collecting outstanding payments from your debtors and, therefore, this type of invoice finance is more expensive than invoice discounting.

Typically, invoice discounting costs are made up of two fees, the service fee and the borrowing fee. The service fee is charged per invoice and calculated as a percentage of your turnover, whereas the borrowing fee increments with interest until the client pays their invoice.

Other hidden costs that may be associated with invoice finance services include application fees, credit check fees, mailing fees, and processing fees. It’s important to look out for any of these before you sign an agreement.


What is the difference between invoice factoring and discounting?

Let’s take a closer look at each of the financing options.


Invoice factoring entails a closer working relationship with the factoring company. A business will sell its outstanding invoices to a factoring company at a discount.

The financier then provides you with their professional credit control services so that you can focus on other aspects of your business. This is ideal for SMEs that may not have the time or resources to spend chasing late-paying clients.


Invoice discounting is the most simple form of invoice finance because it’s pure money. You’re in charge of collecting payments and your clients don’t need to know that you’re using a finance facility to advance payments.

Invoice discounting is only available to larger businesses with more established reputations and typically a minimum turnover of £250k. These companies tend to have their own collections team and will be entrusted to collect the payments from their customers by themselves.

Many companies enjoy the credit control service offered by factoring facilities because it gives them more time to focus on their business. Others prefer a more hands-on approach when it comes to collecting payments, as this keeps their use of invoice financing services strictly confidential.

Ultimately, the decision between factoring and discounting rests on the size of your company’s turnover, whether you want to collect the payments yourself, and whether you wish to be discreet about the invoice financing facility.

Are there any restrictions to invoice financing?

As with any financing route, there are some restrictions to invoice financing.

Invoice financing is only a viable option for your business if your clients are other businesses, so you will be restricted if you work on a B2C basis.

Some lenders insist that you must finance all your unpaid invoices through them. However, Sonovate can operate on a client-by-client basis without the need for an all-turnover agreement.

Until you offer up a personal guarantee and debenture, many financing facilities won’t provide you with the funding you need. Sonovate doesn’t require any personal guarantees and a debenture is only needed once certain lending thresholds are met.

Invoice financing contracts tend to last for a minimum of 12 months and exiting any earlier can result in hefty penalty fees. With Sonovate, there’s no long-term contracts and you only need to give a 30-day notice to exit.

Many invoice financiers choose to hold reserves until the invoice is paid in full. Sonovate will release up to 100% of the invoice value after the timesheet or Statement of Work (SoW) milestone is approved.

If you opt for invoice factoring, you are outsourcing this responsibility to third parties and it’s important to get to know your funder to ensure they are suitable for your business. I.E. Are they specialised within your industry, and are their team experienced? This can also improve and impact your customer relationships. Although less control of negotiating payment terms, you are handing over this responsibility to the factoring company, and therefore don’t have to look like the bad guy when collecting and chasing payments, Instead you can focus on business. Whereas, with invoice discounting, as collections sit within your business you would be responsible for collection of the funds from the end client.

How can invoice financing help plug the cash flow gap of a business?

Invoice financing helps bridge the cash flow gap by providing up to 100% of the invoice value in as little as 24 hours. Let’s illustrate this with an example.

  • Let’s say your invoice finance company has agreed to charge a 1% fee for their factoring services.
  • You issue your client an invoice for £10,000 and the factoring company will advance you £9,900 (100% of your invoice). The invoice factoring business has already deducted its 1% fee (£100) and you don’t have to wait any longer to get the cash that you are owed.
  • If you were to use a bank, you would typically only receive 80% (£8,000) of the outstanding invoice upfront. You would then get the remaining 20% (minus any bank fees) once your client has paid the invoice, which could take weeks or even months.
  • The cash flow gap is the period in which you are waiting to receive the remaining funds.
  • High advance invoice finance helps alleviate this burden, especially when 80% of your invoice is directed to the contractor.

Recruitment Invoice Finance

Invoice finance is crucial for the recruitment sector because without a steady stream of cash, agencies aren’t able to operate at their full potential.

Recruitment agencies work with companies of all sizes and with customers from varying industries. Many businesses have payment terms that exceed 45 days, and some larger firms can even take more than 90 days to pay their invoices. This creates a disruptive gap on a recruitment agency’s balance sheet.

In these instances, the clients always have the upper hand. If a recruitment agency doesn’t agree with the payment terms, their clients will simply seek out another agency that is willing to work with them.

Temporary recruitment agencies suffer from severe cash flow problems as they need to pay their worker’s wages multiple times before clients pay their outstanding invoices and provide the cash to do so.

Outside of retained search agreements, payment is almost always paid out on the delivery of a milestone – (timesheet, SoW, placement of a permanent candidate) at a future point according to payment days. This can take a long time, resulting in substantial cash flow gaps of up to 90 days. Unless the recruitment agency has access to huge cash reserves, they won’t have enough liquidity to pay their workers on time without some kind of financing.

Clients who fail to pay on time can then restrict the recruitment agency from paying their workers and derail even the most profitable agencies. The delay in funding, alongside the peaks and troughs of demand experienced by recruitment agencies, inhibits the company from developing any further.

Not only this but why use your own cash reserves to pay for expenses when it can be used to accelerate growth and hire new people? Invoice finance is typically regarded as a defensive manoeuvre, however, it can also be used strategically to keep cash availability high.

Invoice financing can support and provide access to all elements and ingredients that help to increase the value of your business by advancing the invoices that you’re owed ahead of time. It’s a sustainable way to pay your workers, cover your overheads, and grow your company – all at the same time.

International Invoice Finance

If your company works with the import and export of goods or services, you will also benefit from international invoice financing. The international trade industry often deals with long payment terms coupled with high demand.

Invoice financing can help your business fund international trade in two ways.

Firstly, it can help fund any outstanding invoices from overseas that come from a subsidiary of a UK company. For example, if you’re a recruitment agency in the UK with a subsidiary in the United States, invoice financing can help fund national or international invoices from that branch.

Secondly, it can help fund export invoices within the UK. For example, if you’re a recruitment agency based in the UK and you work with international clients, invoice financing can help fund outstanding invoices.

How Sonovate helps different types of businesses and needs

For start-ups

A funding and back office platform is specifically designed as a one-stop shop to get started – invoices, contracts, timesheets and funding in one place – so you can stop worrying and focus on clients.

For enterprise

A funding platform that helps you scale. With our recruitment invoice finance, you have funding on tap to reinvest in your business. Book a consultation with us today.


Do you need good credit to get invoice financing?

Not necessarily, whilst your business’ credit history is taken into consideration, the credit focus is instead on the credit quality and repayment history of your customers.

This makes invoice financing a great option for new businesses that don’t have an established credit rating or trading record yet.

What happens if a debtor refuses to pay an invoice?

Before you finalise any contracts relating to invoice finance services, you should always disclose what happens if a debtor refuses to pay an invoice.

The most cost-effective solution would be for you to return the full amount of the cash advance, within an agreed period of time. This is known as recourse factoring and your business becomes liable for the unpaid invoice.

Another option is non-recourse factoring. In this instance, the factoring company takes responsibility for any non-paying customers and they cannot ask you for the payment. However, as the lender takes on more risk, the deductible factoring fees become much higher.

Nevertheless, factoring companies have a team of professionals who dedicate themselves to collecting outstanding payments from clients in the most efficient way possible. Not only this but invoice finance companies will vet your clients thoroughly before agreeing to advance their invoices.

How long does it take to set up invoice financing?

Invoice financing doesn’t take long to set up at all, especially in comparison to other forms of financing in the UK.

After your first appointment, your business could start using invoice financing services in as little as 24 hours.

Once you are all set up, you can get access to your funds in just a matter of 24 hours.

Is invoice finance suitable for start-ups?

Yes, invoice financing is an ideal solution for start-ups.

Unlike traditional forms of financing, such as bank loans or overdraft, invoice financing doesn’t demand you to be a well-established business with an immaculate credit rating to receive the finance you need.

It focuses on the credit quality of your customers instead, making it a highly viable solution for start-ups and SMEs.

Invoice financing also helps new and emerging companies quickly convert credit sales into cash, which can help fuel growth and accelerate the development of your business.

What checks are involved with getting invoice finance?

The checks on your own business are rather limited, instead, invoice finance companies focus on checking the history of your customers.

Lenders will make sure your clients have a substantial credit score and reputable repayment history before they agree to finance any invoices.

This makes it much easier for new businesses and smaller companies to qualify for invoice financing than it is for them to secure loans from the bank.

Nevertheless, if your business has a strong credit score, steady turnover, and a considerable reputation, you will most likely benefit from more favourable rates.


Is invoice financing regulated?

No, invoice financing is not regulated by the Financial Conduct Authority (FCA) in the UK.

Since the invoice finance industry is unregulated, borrowers should ensure all contracts have a clear termination clause and that all fees are clearly stated.

However, the sector has established a clear code of conduct to ensure the best possible service. Not only this but being an unregulated industry removes the costs of regulation that are typically passed on to customers, allowing business owners to receive the maximum amount of cash in the shortest amount of time.

Can small businesses get invoice finance?

Yes, small businesses can benefit greatly from invoice financing.

However, to be eligible for the service you must be a business invoicing other businesses with a minimum turnover of £50,000 a year.

I’m a contractor, how do I benefit from invoice finance?

Invoice finance can help contractors be certain that they will be paid on time, every time.

When it comes to recruitment agencies, time and money are of the essence. All payments need to be delivered on time so that employees can be paid and expenses can be covered.

Invoice finance lenders can advance recruitment agencies the money they need to pay their contractors quickly and efficiently.

This way recruitment agencies can stop worrying about cash flow gaps and focus on growing their business.

Accounts payable financing vs invoice financing, what’s the difference?

Accounts payable financing is also commonly known as vendor financing or trade credit because you borrow money directly from the vendor.

Vendors will provide buyers with credit so that they can purchase their goods and/or services. The buyer then uses the profits to pay the vendor back the loan plus an agreed interest rate.

Just like invoice financing, you won’t typically be forced to put up any physical assets as collateral. The main difference between invoice financing and accounts payable financing is that the latter requires a credit check to see if you qualify for the loan.

SMEs and start-ups typically have an unproven or lower credit rating, especially if they are still trying to establish themselves in their industry. Therefore, these companies may benefit more from invoice financing than accounts payable financing.

Our platform

Sonovate is an invoice platform designed to reduce admin, save time, and let you focus on growing your business.

Choose from a funding and back office platform for an all-in-one solution, or just funding to complement existing systems.

Giving flexibility at times you need it, or growth engines when the time is right.