Invoice financing: what is it and how does it work? 

Invoice finance releases cash tied up in outstanding invoices, allowing the supplier access to money before the customer has paid.

Invoice financing means you can avoid the usual wait for invoices to be paid: instead of waiting for the usual payment terms, invoice finance ensures you get most of the cash immediately, so you don’t have to wait to get paid.

How does invoice finance work?

A healthy cash flow is imperative to the ongoing success and growth of any business. Invoice financing helps you to manage your cash flow by bridging the gap between the point at which you make a sale, and the time payment is received from the debtor.

Applying is quick and simple. Once your application is agreed, you can expect to benefit from the cash within 24 hours.

With invoice finance, businesses pay a small percentage of the invoice amount to the lender as a fee for borrowing the money. Nothing needs to be repaid at all to the funder. The funder only collects their money from your debtors when the debtors pay their invoices.

An example:

If we use the example of a business turning over £1m, you will agree to a deal that gives you an advance amount. This is how much of the invoice your lender will pay up-front (for example, 85%). You will also agree on a fee amount with your lender (for example, 1.2%). This means that 1.2% of every invoice that is paid by a client goes to your lender.  

So for example, if you were to raise an invoice for £5,000, your deal would pay 85% of it up-front. This means you would receive £4,250 into your bank account within a couple of days. Then, when the customer pays the invoice, the full £5,000 goes into a bank account controlled by the lender. The lender would then pay you the remaining value of the invoice (£750) minus the fees you agreed with them (1.2%, which equates to £60), so you would receive £690. 

 What are the advantages of invoice finance? 

There are lots of advantages of invoice financing. We have talked about these in more detail here. But in a nutshell, invoice financing can:

  • Give you immediate access to cash without a loan 
  • Support your business growth 
  • Offer a lower-risk option since repayments are linked to invoices raised 
  • Offer a funding option that is no risk to your assets 
  • Give your business access to cash quickly 
  • Reduce your risk of overdue payments and bad debts 

Are there any disadvantages of invoice finance?

There are a couple of things to consider when you explore invoice finance as an option for your business.

Firstly, your customers, will need to be other businesses rather than just members of the public.

It’s also worth being aware that if you use this type of financing, it will no longer be you who chases payments from your clients: your lender will do this for you. This means there will be involvement of a third party in your client relationships.

Am I eligible?

If your business regularly invoices for work, you could be eligible for this kind of finance. A finance facilitator can help you understand whether your business is eligible, and which are the best options for you.  

How PMD can help your business with invoice finance

At PMD, we believe that no business should be held back by their finances. Invoice finance is one of the best ways to ease cash flow problems and ensure that your business can continue to grow.

PMD are experienced in securing invoice finance for clients, and work with businesses across all types of sectors to help facilitate their growth. PMD has access to over 50 invoice financing companies in the Invoice Finance market and will help to take the challenging work out of applying for invoice finance, leaving you free to concentrate on running your business.

PMD’s dedicated team will take the time to understand your business and find the right funder to support your growth plans. If you already have an existing Invoice Finance facility, PMD can benchmark this against what is available in the market and improve on this by either reducing costs or increasing funding, and in many cases both.

Get in touch today to see how invoice financing can help to accelerate your business growth.  To keep up to date with the latest industry news and company updates, give us a follow on LinkedIn.

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