Defining Invoice Financing: What Does Invoice Financing Mean?

Jun 2, 2022

George Holmes

George Holmes

Managing Director + Co-Founder

Invoice finance can be a great way for business owners to ensure they’re able to pay their suppliers and staff, even if their customers haven’t yet paid for the goods or services they have received. It’s essentially a type of short-term borrowing and can be incredibly beneficial to companies in terms of maintaining and improving cash flow. But of course, that’s not all there is to it!

In this blog, we’re going to explain the meaning of invoice financing, who might be eligible, and how it can work in your company’s favour.

Invoice Financing Meaning

How does invoice financing work? Invoice financing is a type of short-term borrowing that allows businesses to borrow money from a lender to offset the amount they’re owed from customers on unpaid invoices. It’s also known as ‘accounts receivable financing’ or ‘receivables financing’.

There are two main types of invoice finance: invoice factoring and invoice discounting. Through invoice factoring, a business sells outstanding invoices to a lender for up to 85% of the value. The lender will collect the outstanding invoices from the customer directly and charge the business interest and other fees for doing so. Provided the invoices are paid in full to the lender by the customer, the lender will remit the remaining invoice amount to the borrowing business.

Invoice discounting works in a similar way, but the lender isn’t responsible for collecting the outstanding balance from customers. When the borrowing business is paid from the customer, they pay back the lender along with additional fees and interest. This is more discrete if you want to maintain direct communication with your client and not make them aware that you’ve financed their invoice.

Why Choose Invoice Financing?

There are several benefits to choosing invoice financing, with the main one being that your business’ cash flow isn’t disrupted by unpaid invoices. It’s common for businesses to lend credit to customers on extended payment terms, especially with invoices that are of a high value.

The problem is, the gap between providing a service or product and getting paid for it can be up to three months (sometimes even longer), and during that time, you’ll need to pay your suppliers and your staff. This can cause a cash flow problem and be a real issue for businesses, but invoice financing can help prevent that.

For example, if you’re a construction company and carry out £10,000 worth of worth for another business, you would likely give them 90 days to settle their invoice. During the 90 days, you’ll need to pay suppliers and staff for the materials used and the work carried out, but without the money from the invoice being paid, this can be a sticking point.

When you take out invoice financing with an invoice finance provider, you could be paid up to 85-90% of what the invoice total is upfront by a lender. This means you’ll get paid up to £9,000 of the £10,000 invoice straight away, enabling you to pay your suppliers and your staff, ensuring your business is able to operate without cash flow hindrance.

Another benefit of invoice financing is that it can support your business with growth because you’re able to reinvest money sooner. For example, if you wanted to invest in more equipment or items to increase your working capacity, you won’t have to wait three months to do so. This is particularly true if you’re financing more than one high-value invoice.

Invoice Financing at Aurora Capital

At Aurora Capital, we’re proud to be trusted invoice finance providers. We offer three types of invoice financing: 

  • Factoring: Invoice factoring involves the invoice finance provider paying the majority of your invoices upfront and then liaising with your customers for payment of any unpaid invoice. Some businesses would prefer their customers don’t know they’ve financed their invoices, but it’s a common practice which shouldn’t reflect poorly on your business.

  • Discounting: Invoice discounting means invoice finance companies pay up to 90% of the outstanding invoice total, before the customers are chased for payment. When funds are secured, the business then pays back the invoice finance facility the money owed, plus fees. With invoice discounting, the company maintains contact with the customer but they will remain unaware of the invoice finance element.
  • Selective: Through selective financing, we can release capital to a business for a single invoice as opposed to all invoices on their books. Factoring and discounting invoices relate more to multiple invoices, making selective invoicing ideal for one larger invoice that is outstanding or one for which longer payment terms have been agreed. 

As a leading invoice financing provider, we are committed to finding the best type of finance agreement for your business. Our goal is to help your business grow and ensure you have no sticking points in cash flow that could prevent this. That’s why we provide multiple types of agreements and are on hand to advise you on what might be best for you.

We work with a wide range of trusted lenders and are able to secure excellent repayment terms for our clients. We will work with you to help your business operate smoothly and ensure you’re able to pay your staff and suppliers, as well as continually grow and become a stronger, better business. If this sounds like a good option for your business, you can find out more about the application requirements below.

Who Can Apply For Invoice Financing?

Invoice financing is suitable only for businesses that operate on a B2B basis, and it’s typically used by companies making large ticket sales and offering their customers 30 or 90-day payment terms.

Another set criterion for invoice financing is that it’s only applicable for goods and services that are delivered in full. You can’t finance an invoice for work that is ongoing – the customer must have received a finished product, and you must have the invoice details. The businesses you work with should also ideally be creditworthy to minimise the risk of unpaid invoices.

To be successful with an invoice finance application, you will usually need a good credit score. Some lenders will work with businesses that don’t have healthy credit, but it will certainly work in your favour if you have a strong rating. As part of the application process, a credit check is typically carried out, and this will show up on your credit file. A hard credit check can impact your overall credit rating, so if your company doesn’t have the best credit rating to begin with, remember to keep this in mind.

Other Business Loans to Consider

Alongside invoice financing, there are a few other types of business loans you might want to consider for your business that may work better for your specific cash flow needs. For example, if you are considering invoice finance as a means of funding moving business premises, there could be a better solution that is more suited to this specifically. Below are some examples of other types of business loans that may be advantageous to your business.

Bridging Loans

Bridging loans are another type of short-term borrowing that essentially bridge the gap between a business incurring debt and having the cash available to pay it off. They’re mostly taken out when a business is growing and wants to move into a new premises but doesn’t have the time to wait for a mortgage application to process.

Bridging loans can be expensive, and so it’s advised that as soon as you secure the cash you need, you take out a different type of loan with better credit terms. That being said, they could be a better option for you than invoice financing if you want to raise money quickly for a business property move.

Revolving Credit

If you routinely need to borrow money, revolving credit could be a good solution. It works like an overdraft in the sense that you will agree to a set amount of money a lender is willing to provide, and you can dip into it when necessary throughout your contract. You can pay it off and re-use it as many times as you need to within your agreed contract length.

Asset Finance

For businesses that are continually growing and need to invest in new equipment, asset finance could be a viable option. It provides businesses with a set loan amount by releasing capital from assets they already have and giving them the funds they need to purchase new assets without impacting their cash flow.

Secured/Unsecured Loans

Secured loans are a common type of business loan that use your property and assets as collateral for the amount borrowed. The more your property and assets are worth, the more you can borrow. You have a good chance of being approved for a secured loan because the lending risk is reduced, resulting in longer credit terms and more manageable repayment plans.

In contrast, an unsecured loan requires no collateral, but personal guarantees are sometimes required. They can be used for almost anything business-related, although the amount you can borrow is usually less than with a secured loan.

Apply for a Business Loan with Aurora Capital

At Aurora Capital, we provide a fast and efficient method of invoice financing, meaning you could receive up to 90% of your owed invoice total within 48 hours of applying. Our fees are competitive, with rates as low as 2%, and we can facilitate high-value invoices into the millions. 

If you’re looking to learn more about invoice financing, or if you need advice on what type of business loan might be the best option for you, please contact us and our team of professional business funding experts will be able to help you find the right solution.

Table of contents

Related Posts

How to Start a Business (With No Money)

For many, the route to starting a business involves finding venture capital or using angel investors - but did you know that many business ideas...

25 Start Up Business Ideas

If you have the entrepreneurial spirit, the business sense, and the courage to take on the risk of starting a business, then you have almost...