If you’re finding it hard to get customers to pay their invoices on time and you need to pay your suppliers and improve your cash flow balance, invoice financing can be an option. Invoice financing is becoming increasingly popular among small business owners because of its convenience.

This guide will cover:

  • What is invoice financing?
  • How does invoice financing work?
  • What are the different types of invoice financing?
  • How do I qualify for invoice financing?
  • How do I apply?

What is invoice financing?

Invoice financing allows businesses to borrow money against unpaid invoices. You use this service when you need the money due from customers before they have paid what they owe you. 

If you need to improve your cash flow (the balance of money flowing in and out of your business) or pay suppliers, invoice financing can be a good option. 

You can find out more about what invoice financing is in this guide.

How does invoice financing work?

Invoice financing providers buy your unpaid invoices from you and pay a portion of the total amount due to you once your customer pays their debt. The lender then takes the rest of the money as a service fee. How much they charge depends on the service provider you choose. 

Typically, invoice financing companies can pay you up to 85% of the value of your invoices and send you the remaining 15% (minus fees) when your invoices are paid. Once you have an agreement with an invoice finance provider, you can choose which invoices you want to raise money from. 

Since invoices serve as a guarantee on the funds you borrow, it’s often easier to qualify for invoice financing than other types of business loans.

What are the different types of invoice financing?

There are three types of invoice financing options to choose from, as we’ve listed below:

Invoice factoring

This is when a factoring company takes control of your business’ sales ledger for a specific amount of time, usually 12-24 months. A sales ledger is a document where you record the money you receive from sales, plus what customers owe you. 

During that time, the provider collects your invoices from customers on your behalf. When your customers pay their invoice, the company will take a percentage as a fee and pay you back the rest of the amount. 

Invoice discounting

Here you have more flexibility since you can pick and choose which outstanding invoices you want to receive financing on. Invoice discounting also means it’s up to you to make sure your customers pay you on time (known as credit control) and collect the payment from them. 

Asset-based lending

Asset-based funding is where you combine invoice and asset financing (using your company’s assets to get a loan). Lenders will use your assets (property, stock, equipment) as a safety net in case your customers don’t pay their invoices.

This type of financing is usually better suited for larger companies and may not be relevant to your business. However, as your business grows, it’s good to know that it’s an option. 

How do I qualify for invoice financing?

Invoice financing is easier to qualify for than other business loans. As long as you have unpaid invoices (outstanding receivables), you’re eligible to apply for invoice financing.

However, there are still some requirements that you need to meet for invoice financing. These requirements will vary depending on your and your business’ situation. Generally speaking, invoice financing companies focus on the quality of your invoices, such as the total amount and the customer’s likelihood of paying their debts. Lenders will look at your customer’s repayment history for this purpose. 

It’s also very likely that lenders will look at your credit score, time in business, and annual revenue. As with all types of financing, the stronger your business seems, the more likely you are to access invoice financing with the best rates and terms.

How do I apply for invoice financing?

After reading this information, do you feel like invoice financing can meet your needs? You’ll want to find the best lender for your business and start the application process.

Invoice financing processes are usually pretty fast and simple, especially compared to more traditional bank loans. Your invoices will play a large role in determining the amount and terms of financing you qualify for. Therefore, it’s your invoices themselves that will be the most important part of the application process. 

However, depending on the lender, they may also ask you to submit additional information about your business and financial situation. These details could include:

  • Driving license
  • Business bank statements
  • Business financial statements
  • Personal and business credit scores

For most lenders, you’ll be able to complete your application online in just minutes. Some companies may also allow you to connect your accounting software to their platform so they can evaluate your qualifications more easily.

Now that you know how invoice financing works, hopefully you feel confident you can find the best deal for your business and apply.

Make financial management simple with Countingup

By setting up a Countingup business current account, you can manage all your financial data in one place. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. You’ll receive real-time insights into your business finances, profit and loss reports, tax estimates, and the ability to create and send invoices in seconds.

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward!
Download the Countingup app to apply for your business current account in minutes. All you need is proof of ID and a selfie. Download the app here.

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