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Invoice finance, explained without the jargon
You’ve shipped the goods and sent the invoice. Invoice finance is someone paying you most of that invoice now, and collecting from your buyer later. Here is exactly how it works, what it costs, and when it is the wrong tool.
If you sell to other businesses, you already know the problem. You quote, you produce, you ship, and then you wait. Sixty days. Ninety. Sometimes a hundred and twenty. The work is done and the money is somewhere else.
Invoice finance is someone advancing you most of that invoice now, and being repaid when your buyer pays. That is the whole idea. Everything else is detail.
The mechanics, in five lines
- You issue an invoice to your buyer as normal, on your normal terms.
- You send that invoice, plus the documents proving you shipped, to a financier.
- They check the invoice is real and the buyer is likely to pay it.
- They advance you most of its value, typically 80% to 90%.
- Your buyer pays on the original due date. The balance is released to you, less the financing cost.
Your buyer’s experience does not change. The due date does not move. In most arrangements the buyer does not need to sign anything, or even be told, though some structures do involve them.
What it costs, and how to compare offers
Pricing is usually quoted as a percentage per 30 days on the amount advanced, plus a fee per invoice or per drawdown. Two things matter more than the headline rate:
- What the advance rate actually is. An 85% advance at a slightly higher rate can be better than 70% at a cheaper one, because the cheap money you cannot access is worth nothing.
- Whether the cost is charged on the advance or the invoice face value. These are not the same number, and quotes are not always explicit.
Ask for the total cost of financing one specific invoice for its full term, in your currency, as a single figure. Any financier who cannot produce that quickly is not being straight with you.
Recourse: the question that decides your risk
If your buyer never pays, who absorbs it?
- With recourse. You do. The financier reclaims the advance from you. This is cheaper, and it is the common structure.
- Without recourse. They do, within limits set out in the agreement. This costs more, and it usually depends on credit insurance being available on your buyer.
Neither is right or wrong. But you should know which one you signed, because it is the difference between financing and insurance.
The words other people use for this
The same product appears under several names, which is a large part of why it seems complicated:
| What you’ll hear | What it usually means |
|---|---|
| Receivables finance | The category. Any funding secured against invoices. |
| Invoice discounting | Usually confidential: you keep collecting from your buyer yourself. |
| Factoring | The financier typically takes over collection, and your buyer knows. |
| Supply chain finance | Usually the buyer-led version. See supplier finance. |
When invoice finance is the wrong tool
It is worth being clear about this, because it is oversold.
- You need money before you ship. Invoice finance starts at the invoice. Pre-shipment funding is a different, harder product.
- Your buyers are consumers. This is business-to-business only.
- One buyer is nearly all your revenue. You can still be funded, but concentration limits will bind, and pricing reflects the risk.
- The underlying problem is margin, not timing. Financing a loss just finances it faster.
What a financier is actually looking at
Less at you than you might expect, and more at the transaction. The usual questions are:
- Is the buyer creditworthy, and do they have a record of paying on time?
- Do the documents agree with each other: invoice, purchase order, bill of lading, packing list?
- Is the delivery complete, so there is no reason for the buyer to dispute?
- Is the corridor and the jurisdiction one the financier can actually work in?
This is why invoice finance is available to businesses that banks turn down for a loan. You are not being assessed on your balance sheet. You are being assessed on a transaction that has already happened.
The shortest useful summary
Invoice finance converts a receivable into cash at a cost. It is a good trade when the cash lets you take the next order, hold a supplier discount, or stop funding your customer’s working capital out of your own. It is a bad trade when it is covering for a business that does not make money.
If you want a number rather than a theory: send us one invoice and the buyer’s name, and we will tell you what it would cost.