How to use Invoice Financing for your Small Business

Businesses often find that their customers don’t pay for their goods or services 30-90 days after the invoices are issued, sometimes as long as 180 days afterwards. This funding gap is one of the biggest challenges SMEs face, and the late payment of invoices can cause significant cash flow issues to cover business expenses, paying staff, and growing the business to fulfil larger orders or contracts.

Invoice factoring is an incredibly useful finance solution which allows companies to sell their invoices to a factoring company in exchange for immediate cash. In the process, ownership of the invoices transfers to the factoring company and 30-180 days after, will get paid by the end customer.

Invoice factoring for small businesses is fairly straightforward. As an example, an end customer might not pay off the £100,000 invoice issued to them for up to 90 days, but your company needs the funds in 2 weeks, in order to pay for business expenses and salaries. The small business could seek a business loan or overdraft to cover this deficit, but applying for secured or unsecured loans can be a fairly time consuming process, and might require the business securing real estate or some form of guarantees in order to qualify.

The small business can work with an invoice financier, which in turn, would agree to buy the invoices for a total of £970,000 (minus a 3% charge of £3,000). The factor might pay 80% (£80,000) up front and the remaining 17% (£17,000) once the customer has paid up.

Summary of invoice finance transaction:

Total value of the invoice being received: £100,000
Fee (3%): £3,000
First advance (80%): £80,000
Second advance (17%): £17,000

What are the charges for invoice factoring services?

The 3% factoring charge varies depending on the situation, and there might be several charges:

Discount charges

They work like bank interest and are usually around 1.5% to 4% over base rate (the lending rate a central bank will charge the lender). The charge is usually applied on a daily basis and applied monthly.

Credit management fees

There is a fee for administration and credit management. The value will be relative to turnover, volume of invoices and amount of customers a business may have. This is usually 0.75% of turnover to 2.5% of turnover.

Invoice discounting fees (and associated services)

These fees are usually lower than for factoring as a company collects and manages their own debts; ranging from 0.2 per cent to 0.5 per cent of turnover.

Credit protection charges

Charges are in line with the level of risk. These could range from 0.5 per cent of turnover to 2 per cent of turnover.

There are two types of factoring, recourse and non-recourse factoring. If the customer fails to make the payment for any reason, with recourse factoring, the company is liable to pay back the receivable to the financier, whereas with non-recourse factoring, the funder is liable for bad debts. With the additional risk, non-recourse factoring is normally more expensive and incurs higher charges than recourse factoring, as it bears the risk of non-payment.

Invoice factoring: what are the advantages and disadvantages?

Advantages of invoice factoring

Invoice factoring for small businesses has many advantages; providing an immediate cash boost into the business, which is beneficial for cash flow. The acceptance criteria for invoice factoring is relatively low when compared to applying for a business loan from a retail bank, and doesn’t necessarily require collateral for a loan. Furthermore, because the approval criteria for invoice factoring services is based on the end customer rather than the business applying, the business doesn’t necessarily have to have a significant trading history, be creditworthy, or own other assets.


  • Quick to obtain and immediate cash injection into the business
  • Easier approval process than traditional bank funding
  • Allows businesses to offer better payment terms with customers

Disadvantages of invoice factoring

Invoice financing can be fairly expensive and there are often hidden fees. That’s why speaking to a broker such as Trade Finance Global can help explain all of the charges very clearly and find the most suitable, efficient source of funding for the business. With invoice factoring, the lender will collect the fees from the customer on your behalf, therefore there’s a potential relationship risk between the business and the customer.


  • Can be expensive and hidden fees
  • Lender collects fees from customer if invoices are factored
  • Process sometimes requires setting up a new bank account

How does invoice discounting differ from factoring?

Another type of finance is invoice discounting. Discounting differs to factoring as a lender does not actually buy your invoices, instead, gives the company a term loan or cash advance where the invoices stand as security. Often invoice discounting companies can advance 100% of the invoices straight away, requiring a certain fixed fee per month plus fees and charges. Small businesses might want to use invoice discounting if they don’t want finance on the full invoice amount or have bad credit.

What is a receivables-based line of credit?

Small businesses might also look for a receivables-based line of credit to help improve the working capital situation within the company. A lender will collateralise the cash held in invoices, accounts receivables and business assets to give you access to a credit line.

The benefit of receivables-based lines of credit are that companies can access larger pools of capital than off a single invoice that is being factored, thereby improving their ability to fund future projects and continue to deliver capital intensive projects (such as those in the manufacturing or pharmaceuticals sector).

What option shall I go for?

For most small and even large businesses, cash flow is king, but finding the right solution to serve the needs of your business can be tricky. Trade Finance Global are experts at invoice finance, be that through accounts receivable financing, invoice discounting or factoring.

As one of the largest invoice finance introducers, we pride ourselves in the help we are able to provide to companies thanks to alternative finance products such as invoice discounting and invoice factoring.

Download our invoice discounting infographic

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