Invoice Finance a Quick Guide For Small Businesses

Although there are many ways to manage the cash flow of a business and it is of course vital to master them if you intend to stay afloat, all of the advice for keeping cash flowing becomes redundant if you find you are already in the midst of a struggle to keep a healthy cash flow.

When your small business hits a cash flow crisis you will probably find yourself casting about for a lifeline, and there will be many offered to you as cash flow solutions are the bread and butter of many finance companies.

One of the most commonly talked about will probably be Invoice Finance an inoffensive sounding term that covers several different financing options. You may also hear it referred to as cash flow finance, receivable financedebtor finance, or sales finance, but what is it?

In simple terms, Invoice Finance is a way for a business to use its debtor book as security and release usually up to 85% of the cash tied up in waiting for money due into the business from unpaid invoices. There are many industries that rely on this type of financing to trade, agencies who supply temporary staff for instance, as their usual practice will mean unusual cash flow situations as they have to pay large numbers of staff on a weekly or daily basis, but will probably await the settlement of invoices for the supply of the staff for a month or so.

The term Invoice Finance actually covers three main types of finance solutions and although all achieve the same goal of freeing up a business’s cash flow and all use outstanding invoices as security, the three work in subtly but crucially different ways.


With factoring a finance company will step in and take over the management of a business’s sales ledger and credit control. In essence, the invoices are ‘purchased’ for a large percentage of their worth to release the cash back into the business and the factoring company then pursues the debtors in the usual way. Many small new businesses prefer this as they often lack the facilities to manage their own credit control.

Invoice Discounting

Like factoring in that it releases a similar amount of cash back into the business with outstanding invoices used as security, but usually a confidential service without customers aware that financing is being used. Unlike factoring a business will retain its credit control management. Larger firms with credit control departments or businesses uncomfortable with customers knowing their financial arrangements often opt for invoice discounting over factoring.

Asset-Based Lending

Whereas with both of the other two previous borrowing options, cash is released against outstanding invoices, asset-based lending will release money against all of the potential assets of a business; this can typically include property, equipment, machinery, stock, and even the company brand if valuable enough as well as the usual invoices. This is obviously a way to raise much larger sums and is most often used when there has either been a single event to cause a major cash flow crisis or to fund an expensive venture such as a merger or acquisition.

Whichever option you decide is right for you and your business good luck

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