Invoice finance: borrowing against money you are owed

Invoice finance turns unpaid invoices into cash now, at a cost. For a business that sells on credit terms and grows, it addresses a real structural problem: the faster you sell, the more money is tied up in invoices waiting to be paid. It is also sold enthusiastically to businesses whose actual problem is something else, and the difference between those two situations is worth establishing before signing anything.

What invoice finance provides

• An advance of a percentage of each invoice — typically most of it — paid within a day or two of issue.
• The balance, less fees, when the customer eventually pays.
• In factoring, collection by the finance provider, who contacts your customers directly.
• In discounting, confidentiality: you keep collecting, and customers need not know.
• Optionally bad debt protection, which is insurance bundled in rather than part of the financing.
• Not a loan secured on assets, and not an overdraft — the facility grows with sales rather than being a fixed limit.

Factoring against discounting

Factoring hands over the credit control function, which suits a business with no collections capability and a tolerance for the provider contacting its customers. Discounting keeps the relationship private and requires you to run collections properly, which providers only allow when your processes and records are good enough. The choice is usually made on capability rather than preference, and a business told it must take factoring is being told something about its own ledger discipline.

Read the total cost, not the headline rate. A service fee on turnover, a discount charge on the advance, arrangement and minimum fees, and charges for invoices unpaid beyond a period all stack up — and the cost of a facility is routinely quoted as the smallest of those numbers.

When it is the wrong answer

1. When the real problem is slow collection: financing invoices nobody is chasing buys time at a price instead of fixing the cause.
2. When margins are thin, since the total cost can exceed the profit on the work being financed.
3. When the ledger is concentrated — most providers will not advance much against a single large customer.
4. When the business is shrinking, because the facility shrinks with it at exactly the wrong moment.
5. When the invoices are disputed or milestone-based, which providers discount heavily or exclude.

Before signing

Check the notice period and the minimum term, which are frequently a year or more with substantial early exit fees. Check what happens to invoices already financed if you leave. And check the concentration limits against your actual ledger rather than against your intended one, because a facility sized for a diversified customer base is worth much less to a business where two customers are half the revenue. Those three questions are where the unpleasant surprises live.

Ettex Invoices keeps the ledger that any provider will want to see — invoices, dates, terms and what has been paid — which is also the information that decides whether discounting is available rather than factoring. Whether the facility is needed at all is usually visible first in the ageing report.