What is invoice finance?

Invoice finance is a form of business funding which allows companies to close cash flow gaps by raising funds with their accounts receivable ledger, either by selling the outstanding invoices to a lender or by using them as security for a line of credit.

Invoice finance can also be known as debtor finance, receivables finance or accounts receivables finance. To make things more confusing all these terms are interchangeably. However, invoice discounting and invoice factoring (which we’ll cover in more detail) are specific types of invoice finance.

In this article, we’ll delve into what it is, the types on offer to businesses and their pros and cons.

Invoice finance and the Babylonians

Invoice finance has been around a long time! It harks back to the days of King Hammurabi and the Babylonians. An inventive people, when they weren’t coming up things like writing, boats and the wheel, they were trading overdue debts for up-front cash. Whilst things have changed a bit in the last 4,000 years, the basic premise has stayed more or less the same.

Let’s take an example. A locally run manufacturer makes delicious apple cider. They’ve had some great news, their product is being stocked by a national retailer! They produce a run of the cider and supply it to the retailer along with an invoice. However, the retailer insists on payment terms of 45 days, as it does from all of its suppliers. This creates a cash flow problem for the cidermaker. They’ve paid for raw materials, staff, operational costs but have to wait for the payment.

Invoice finance is a form of short term finance secured against unpaid invoices like these. It can be a line of credit or a cash advance.

It’s used by businesses to improve cash flow, purchase equipment, inventory, and raw materials. It helps them meet payroll and cover operational expenses.

When applying for invoice finance, the lender will want to know about the risk associated with the debtors, as well as the age and quality of the invoices. Other factors they consider are aging (how old the invoices are) and concentration (how many debtors a business has). A ledger full of newer invoices spread over many debtors is more likely to be funded.

Types of invoice finance

Let’s look at the two different kinds of invoice finance; factoring and discounting.

Invoice factoring - The entire accounts receivable ledger is sold to a factoring company (or factor). The business can access funds (the first 70-85%, known as an advance) usually within 24 hours. The factor then takes responsibility for collection of the debt. Once it’s been paid, they remit the outstanding amount, called the rebate, less any fees which can range from 2-5%.

  • Relatively easy to apply for and often used by small businesses experiencing cash flow problems. Other types of business finance may not be available to them
  • The factor takes responsibility for collections and credit control. They manage payments, chase overdue invoices and deal with customers

Advantages and disadvantages of factoring

AdvantagesDisadvantages
Instant working capital boost - businesses can cover payroll, meet operational costs and expandMore expensive than other kinds of business funding
It grows with the business - as more invoices are raised the amount available increasesFunds available is capped by the total ledger value
Does not require a fixed asset, such as property for securityCan involve long contracts (often 2 years)
Saves time, as the factor manages credit control and collectionsUsually whole ledger funding, can’t pick and choose customers / invoices
Offers security and protection against bad debtors (non-recourse facility)Your customers know you’re factoring
Compared to other types of business loan, relatively easy to obtain fundingIt enjoys a somewhat negative reputation

Invoice discounting - There is one key difference between discounting and factoring. The finance company remains hidden in the background, which means credit and collections remain the responsibility of the business. The business keeps control of those important customer relationships.

Advantages and disadvantages of discounting

AdvantagesDisadvantages
Instant working capital boost - businesses can cover payroll, meet operational costs and expandMore expensive than other kinds of business funding
It grows with the business - as more invoices are raised the amount available increasesUnlike factoring, no financial admin help from lender
Does not require a fixed asset, such as property for securityFunds available is capped by the total ledger value
Lender doesn’t interfere with client relationshipsUsually whole ledger funding, can’t pick and choose customers / invoices
Short term option - usually doesn’t involve long contracts
Usually suited to larger companies

The Waddle Difference

Waddle offers a modern form of invoice finance. We've built an innovative receivables finance solution allowing businesses to close the cash flow gaps that are holding them back. The Waddle platform seamlessly connects with cloud accountancy platforms, like Xero & MYOB and generates a finance offer within a few clicks.

Once approved, Waddle offers an instant line of credit based on your unpaid invoices, which is adjusted in real-time as they are raised and paid. You pick the invoices to fund and only pay for those that you draw down. And thanks to the cloud accounting integration, bookkeeping is a breeze with no invoices to upload and instant reconciliation.

It’s also fully confidential, so your important client relationships stay with you. And Waddle offers the friendliest terms with no minimum monthly spend, no contracts or hidden fees, giving you fast and easy access to working capital with minimal fuss. Get an offer now!