Invoice finance provides companies with a way to release money tied up in their due or overdue invoices. The UK has long had a problem with business settling their invoices in time – so much so that in 2008, the then Government set up the Prompt Payment Code to encourage debtors to pay up faster.
Invoice finance is one of the fastest growing forms of commercial funding in the UK with over 42,000 clients using the services of the members of the Asset Based Finance Association.
Which businesses should consider invoice factoring? Is the market competitive and will you get decent rates? Will the charges you pay deliver more in value to your business rather than continuing to chase up payments yourself?
In this article, we examine:
- what invoice finance is and how it works
- how much does invoice factoring cost
- the state of the invoice factoring market in the UK today
- the questions business owners ask most about invoice factoring
- the advantages of using a broker service to find you invoice financing for small business
With over 140 different funders in the UK, it can be complicated and time-consuming finding the right invoice finance provider for your company. If you get it wrong, you may end up paying more than you need to for the facility itself and for the invoices you process through your funder.
Fill in the form at the top of the page, tell us a few details about your business and who you trade with, and we’ll approach the invoice finance companies on our panel most likely to be able to offer. We’ll aim to come back to you with the 3 or 4 offers we consider as offering your company the best value for money and the range of support services most beneficial to your business.
There’s no obligation to accept any offer made to you by one of our partner invoice finance companies and our service is free of charge at all times.
What is invoice factoring?
When your clients purchase your goods and services, they do so under your company’s terms and conditions. Your terms and conditions set out what you’ll deliver to the customer and at what price. Your invoice will display a “due date” – that’s the day on or before which payment in full has to be made (as long as there is not a dispute).
The fact that there is a binding contract covering both parties means that there is “legal import” behind that contract. If one of you breaks the terms and conditions of the contract, you may take the other one to court. One valid reason you may choose to take your client to court is that they have not paid you in time for the goods and services you’ve delivered.
This “legal import” has value on the open market – rather like your home does when you agreed to your mortgage lender that they could take security over it in exchange for borrowing the money.
With invoice finance, often called invoice factoring, a funder “buys” the invoice from you. When you sell the invoice to the funder, they will pay you an advance on that money. When the client pays their bill, you receive the remainder minus their fees.
So, if you offered a client 60 days’ payment terms, you would generally wait 60 or more days for the payment. However, if you sell the invoice to a factorer, they will pay you an advance on it.
How much advance do you get paid? Normally, it’s at least 80% of the value of the invoice however, in recent years, intense competition between providers has meant that most now pay 90%.
When you issue the invoice to the client, you also send it to your factorer. You will normally be paid within 24 hours. When the client settles up, you receive the remaining amount minus the factorer’s fees.
Please note that, with most factorers, you can’t sell the invoice to them unless the work is completed. For example, if you tie up a customer to a year’s contract with monthly payments and, during that year, you provide goods and services to them, you can’t factor that invoice.
Some factorers do allow payment on milestones with a job however – this is particularly common in the construction sector. If you need an invoice factoring which allows you to invoice by milestone, make sure you let the company know when you contact them about what you want. Most won’t be able to help however a growing number will be.
Get limits on each of your customers
Lenders will only provide invoice funding for your customers up to a certain limit. The amount that they’re able to fund per customer will depend on that company’s credit history, the length of trading, and the details contained in their published accounts at Companies House.
Your factorer will allow a client’s “tab” to build up to that limit (unless they have invoices which are past due). If the cumulative value of all invoices not yet due but outstanding to a client passes their limit, you will need to either:
- ask the funder for an increase in the client’s limit,
- issue an invoice for the amount which will not be covered by the factorer’s limit on the understanding that the factorer will not advance the money to you or chase payment, or
- issue an invoice for the amount which will not be covered by the factorer’s limit and take the cash in advance to performing the work for the client.
How much does invoice factoring cost?
There are two main types of fee payable to invoice factorers – the discount fee and the services fee.
The discount fee is a percentage of the value of the invoice issued. For example, if you issue an invoice to a client for £20,000 and the discount fee is 2%, the cost to you will be £400.
The service fee is a monthly amount charged set at a percentage rate of your annual turnover divided by 12. For example, if you turned over £200,000 a year and the service fee was 3%, your facility would cost you £6,000 a year (£500 a month) even if you never raised an invoice.
What is the difference between invoice factoring and invoice discounting?
Invoice discounting is a form of invoice factoring and it differs from factoring in the following important ways:
- with invoice discounting, you’re responsible for collecting payments from clients whereas with most invoice factoring services, agents working for your factorer are responsible for collecting payments.
- because agents are responsible for collecting payments, your client will know that you’re using an invoice funding service whereas, with invoice discounting, it’s much easier to keep the fact that your invoices are being funded from customers.
- with invoice factoring, you do not need to have a credit control and sales ledger management teams however, with invoice discounting, your funder will require that your company has these teams in place already and they will require that you demonstrate that they are good at collecting payments from clients.
- most smaller companies cannot afford credit control and sales ledger management teams so, for those companies, an application to open an invoice discounting facility will be rejected.
UK invoice factoring today
There are over 140 invoice factoring companies in the UK in 2020 – competition has never been so fierce especially as the number of companies using the service has risen substantially in the last 5 years.
14 of the leading invoice financing companies in the UK
Companies like Funding Invoice are another recent entrant to the market and it’s the presence of companies like these which has meant that both discount fees and service fees have fallen significantly since the Great Crash of 2007-2008.
Below, to give you an indication of the rates charged by different providers, we list fourteen of the country’s leading invoice factorers.
|Minimum turnover||Advance Rate||Discount fee||Service fee||Trustpilot No Reviews||Trustpilot Av Score|
|ABN AMRO Commercial Finance||£1,000,000||90.0%||1.5%-3.0%||0.2%-1.0%||0||0.0|
|Aldermore Invoice Finance*||£60,000||90.0%||1.5%-3.0%||0.3%-3.0%||583||4.3|
|Ashley Business Finance||£50,000||90.0%||1.5%-4.0%||1.0%-3.0%||2||2.5|
|Barclays Invoice Financing*||£100,000||90.0%||1.5%-4.5%||0.3%-1.0%||2811||1.4|
|Bibby Financial Services||£100,000||90.0%||1.0%-3.5%||0.5%-3.2%||383||4.6|
|Close Brothers Invoice Finance*||£250,000||90.0%||2.5%-3.5%||0.5%-2.0%||3503||4.4|
|Hitachi Capital UK||£50,000||85.0%||0.5%-4.0%||£250||344||4.8|
|HSBC Invoice Finance*||£500,000||90.0%||1.0%-4.5%||0.2%-1.0%||3046||1.4|
|Lloyds Bank Invoice Financing*||£50,000||90.0%||1.0%-4.0%||0.3%-1.0%||1001||1.8|
|Metro Bank Invoice Finance*||£100,000||85.0%||1.5%-3.5%||1.0%-3.0%||2331||3.6|
|RBS Invoice Finance*||£250,000||90.0%||1.0%-4.5%||0.3%-0.5%||419||1.4|
|Skipton Business Finance||£300,000||90.0%||0.0%||2.0%-3.5%||0||0.0|
Here’s an explanation of what’s on the table above:
- minimum turnover – the factorer will not consider opening an account for companies whose turnover is less than this amount
- discount fee – this is the charge made per invoice as explained earlier in this article.
- service fee – this is a fee for the maintenance of the account as explained earlier in this article.
- Trustpilot reviews – these columns show the number of reviews and the average review score for each provider as listed on Trustpilot. Where there is an asterisk (*) next to the factorer’s name, no separate listing exists for them on Trustpilot so we have given the number of reviews and the average rating for the company the invoice factoring service belongs to.
Invoice factoring FAQ
What happens if I have received an advance but my customer does not pay?
In most cases except those situations covered later in this FAQ section, you will be required to repay in full the advance previously made on the invoice your customer has not settled.
Repayment is made one of two ways generally:
- a deduction against future advances and settling payments (more likely if you factor a large number of invoices regularly) or
- a payment from your bank account to your factorer’s bank account (more likely if you have lumpy cashflow or your use of your factorer’s service is intermittent and, in their eyes, hard to predict)
What if my client and I are in dispute about an invoice?
If you and your client are in dispute over an invoice, your factorer will not attempt to collect it until the dispute has been resolved. If the dispute drags on for a long time without any imminent resolution, any advance you received from your factorer may be clawed back.
What is bad debt protection?
For an additional fee on top of the discount fee, you can protect yourself from clawback on a specific invoice in the event a customer can’t settle their invoice to you by taking out bad debt protection.
What is non-recourse factoring?
Non-recourse factoring offers the same peace of mind as bad debt protection except that bad debt insurance is applied to all invoices on an account (except on the occasions where an insurer will refuse to underwrite a debt).
Will my clients realise that I’m factoring my invoices?
With most invoice factoring services, your clients will realise that you’re using an invoice funding service. Many clients are worried that this may put customers off from dealing with them although there is no evidence to suggest that this is actually the case.
Which types of companies can apply for factoring services?
To benefit from invoice finance, your company should sell its products and services to other businesses on 30-day or longer terms. Invoice funding is unsuitable for all B2C transactions – in other words, where your customer is a consumer acting on their own personal behalf.
Most factorers prefer to work with more established business with 6- or 7-figure turnovers however a few will consider 5-figure turnover businesses and new start businesses.
Does a factorer require any type of security?
They will always take security over the invoices you process through them. Some may require additional security like a personal guarantee. However, there are enough competitors in the marketplace meaning that it’s relatively easy to find a funder which does not require a personal guarantee if you’re unwilling to offer one.
Can I factor invoices on overseas trade?
Yes however the discount rates you pay will often be up to 50% higher than on domestic trade. Purchasing bad debt insurance for these invoices is also likely to be more expensive.
International banking groups like Close Brothers, RBS, and HSBC may offer your company better value for money and more effective collection services because of their presence in multiple countries.
Do I have to put all my invoices through a factorer?
The requirements of each invoice finance provider are different. Many will want you to process every invoice through them however others will accept that their clients want to pick and choose which invoices they send for processing.
Generally, the lower the level of invoices you’re contractually required to put through a funder, the higher the discount and services fees you will pay (although this is not always the case).
Securing the best invoice factoring deal for my business
When selecting the best invoice finance provider for your business, you’ll need to consider:
- whether or not you want clients to know that you’re using a funder
- how much the facility will cost each year
- the percentage of the invoice value you’ll be paying to your funder
- whether or not your internal credit control and sales ledger management are experienced and successful enough for an invoice discounting facility
- how important the size of the advance you receive is
- whether or not you do business overseas as well as domestically
There’s a lot to consider. For help and support in choosing the right invoice finance provider, please fill in the form at the top of the page. Once we’ve got to know your business, we’ll approach the providers on our panel likely to offer you the most competitive prices and the level of support you need.
Our service is free and confidential. There is no obligation on you to accept any offer made to you by a partner provider.