*A bloggers guide to invoice financing

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If you have never considered alternative business finance before, it’s definitely a daunting thing to explore. Money certainly isn’t something to be taken lightly. But for many business owners and self-employed people, forms of alternative finance such as invoice financing can be invaluable. One of these forms is invoice financing - a good option to explore for any business who relies on invoices being paid on time.

What is invoice financing?

If you rely on people paying their invoices on time - which many bloggers like myself do - invoice financing could be a hugely beneficial form of alternative finance to consider. With invoice financing, you can release the cash that’s tied up in your unpaid invoices and get paid up front without having to wait until the end of the payment term.

Invoice financing has found its success by being unrestrictive, low risk and by boasting high and fast approval rates. Once an account is up and running, funds can typically be accessed within 24 hours. Plus, there’s no real estate invoices which makes it much lower risk. If you were to turn to a traditional route of business finance you’d likely have to put up personal or commercial real estate as security. With invoice financing, the value of the invoices secures the finance, so real estate assets will never be at risk.

So, how does that work? You basically sell your invoices to a third party for a percentage of their value. Once paid, the lender pays you the remaining balance minus their fee. You are essentially using your invoices as collateral for a loan to keep your cash flow in check. There are a few different forms of invoice financing, however they are all very similar. The aforementioned is called invoice discounting.

Invoice discounting basically means that everything will be financed automatically and up front. The difference between this product over others is that the invoice financier wouldn’t manage your sales ledger or collect debts on your behalf, so it’s down to you to remain the point of contact for your customers or the brands that you’re working with, which is attractive for many business owners and self-employed people!

What are the other types of invoice financing? 

As well as invoice financing, there’s invoice factoring and invoice trading. In a nutshell, invoice factoring works in a very similar way to invoice discounting, aside from the fact that you don’t remain the point of contact when chasing those payments. It’s down to the lender. Some people like this as it frees up their time, but some people don’t want their customers or brands to know that they are using alternative finance - not that it should ever reflect badly on you or your business! It simply shows that you are being responsible with your cash flow.

Invoice trading is quite different as it is based on the principle of peer-to-peer lending. You would auction your invoices individually or in bundles to bidders who then compete to offer the most competitive price to advance them the funds.The seller then purchases back the invoice from the buyer, choosing whether to do so after 30, 60 or 90 days.

How much does invoice financing cost? 

The cost of invoice financing will depend on which option you choose - discounting, factoring or trading. There’s usually a facility fee (a one-off fee applied for setting up the credit agreement) of 0.5-2.5%, along with a charge for the finance on each invoice which again is usually anything from 1-3% over BBR. This fee will probably vary between providers and you might find that fees for discounting will be lower than for factoring because there are fewer services being provided by the credit company.

Then you have the cost of the borrowing itself. For each invoice that you receive an advance for, you’ll be charged a small finance fee - think of it like the interest on a loan, which is usually a few percent. This fee is to cover the time between you receiving the funds and the finance provider receiving the funds from the cleared invoice.

If you are expecting payments from outstanding invoice and it’s causing you cash flow issues, consider invoice financing. Compared to a traditional bank loan the amounts are often much smaller and the terms of repayment are shorter. It’s simple, straightforward and means that you can move forward without having to rely on other people paying up.

Are you a freelancer, blogger or are you self employed? Do you struggle with unpaid invoices?