What it is

Invoice finance lets a business unlock cash tied up in unpaid customer invoices. Instead of waiting 30, 60 or 90 days to be paid, the business receives most of the invoice value up front from a finance provider.

How it works

1. The business delivers goods or services and invoices its customer.
2. A finance provider advances a large share of the invoice value, often 70 to 90 percent.
3. The customer pays the invoice on its normal terms.
4. The provider releases the remaining balance, less its fees.

Factoring and invoice discounting

With factoring, the provider collects payment from customers, who know a funder is involved. With invoice discounting, the business keeps collecting payments itself and the arrangement is usually confidential.

What it costs

There are usually two charges. A discount fee works like interest on the money advanced. A service fee covers running the facility. Some providers add charges for set-up, minimum usage or early exit.

Questions worth asking

• Who bears the loss if a customer does not pay?
• Must every invoice be financed, or can single invoices be chosen?
• How long is the contract, and what is the notice period?
• Is there a limit on how much can be advanced against one customer?
• Is a personal guarantee required?

When it tends to fit

It suits businesses that sell to other businesses on credit terms and are growing faster than their cash allows. It fits less well where customers are consumers, invoices are often disputed, or payment depends on work still to be completed.

The main types

• Term loan. A fixed sum repaid over a set period with interest. Used for defined investments such as equipment or expansion.
• Overdraft or revolving credit. A limit to draw on and repay as needed. Used for short-term swings in cash.
• Invoice finance. An advance against unpaid customer invoices. Used to bridge the wait for payment.
• Asset finance. Funding secured on equipment or vehicles, through leasing or hire purchase.
• Trade finance. Funding to pay suppliers for stock, often for imports, repaid when the goods are sold.
• Merchant cash advance. An advance repaid as a share of future card takings.
• Equity. Selling a share of the business to investors. Nothing is repaid, but ownership is diluted.

Debt or equity

Debt must be repaid with interest and leaves ownership intact. Equity is not repaid, but investors share in future value and often in decisions.

Secured or unsecured

Secured finance is backed by an asset the lender can claim if repayments stop, and usually costs less. Unsecured finance has no specific asset behind it, though lenders often ask directors for a personal guarantee.

What lenders usually look at

Trading history, revenue and profitability, cash flow, existing debts, the credit record of the business and its directors, and what security is available.

Questions worth asking before borrowing

• What is the total cost, including every fee, over the full term?
• Is the rate fixed or variable?
• What security or guarantee is required?
• Are there charges for repaying early?
• What happens if a payment is missed?