Why Invoice Finance Is a Great Option For Managing Business Cash Flow and Debt

Invoice finance is the single most cost-effective means of managing your business's cash flow through debt. Designed for businesses that invoice other businesses with extended credit terms, it provides immediate access to funds tied up in unpaid invoices.

Whilst invoice financing is sector agnostic, we typically see it being deployed in the following sectors:

• Machine hire
• Recruitment
• Manufacturing
• Shipping and logistics 
• Import/Export
• Wholesale
• E-Commerce 
• Construction

Invoice finance only applies to businesses that invoice in arrears for delivered goods and/or services already delivered. Typically, invoices are issued on 30, 60, or 90-day payment terms, meaning payment is received well after the work is completed. This delay can create severe cashflow constraints for the invoicing business, especially for those who have already invested capital into fulfilling orders.  

Invoice Finance bridges this gap by providing a facility that advances an agreed percentage of the outstanding invoice amount to the invoicing business. Lending decisions are based on the financial strength of the invoiced company (the debtor), rather than the invoicing business themselves. 

The most common form of invoice financing is known as "confidential invoice financing", whereby the invoicing company retains full control over payment collection, while the invoiced business is unaware that any financing is being used – this ensures discretion while maintaining a stable cashflow. A typical set of invoice financing terms might look as follows:

• Facility limit: Typically, a percentage of a business's annual turnover
• Factor Rate: Up to 95% per invoice 
• Funding Period: 30-120 days as per your standard credit terms 
• Discount Rate: 1-4% over a Bank of England Base Rate (essentially an interest rate)
• Service Charge: 0.1- 1% per invoice 

There are other forms of invoice finance, including: 

Disclosed Invoice Finance

A facility where the lender takes over credit control processes and manages payment collection directly from your clients. This is typically beneficial for smaller businesses with limited resources to chase payment and oversee facility management effectively. However, this is typically a more expensive option due to the additional labour involved from the lender's perspective.

Selective Invoice Finance

This facility allows you to nominate specific debtors for which funds will be advanced. It is typically useful for businesses with a mix of long and short payment terms or those dealing with large clients who require extended payment periods.

Spot Invoice Finance

A completely flexible facility that allows business to nominate individual invoices for financing on a case-by-case basis. While this is the most expensive option, it is typically used for addressing ad-hoc working capital gaps and managing short-term cashflow.

These types of financing offer many benefits, such as flexibility – allowing businesses to scale and adapt as their needs evolve.  Since the facility grows in line with sales volume, it ensures a consistent cash flow as the business expands. Moreover, unlike traditional forms of financing which often requires extensive restructuring to align with business growth, invoice finance offers a strategic advantage by maintaining a smooth cash flow. This enables prompt payments to suppliers, employees, and other creditors - enhances the business's creditworthiness and ensuring the business can reinvest in growth and maintain a strong reputation.

Enness works closely with over 50 invoice finance providers, ranging from large multinational providers catering to corporate clients with turnovers over £100 million, to the niche and specialised lenders whose products target the more typical SME's. Some lenders specialise in specific industries or sectors, while others are driven by cost efficiency or service.

Although invoice finance can be a complex and multilayered product, when used effectively, it can become one of the most cost-effective tools for managing cash flow. It is particularly useful for businesses with fluctuating revenue cycles, as it bridges the gap during periods of low cash flow. Therefore, enabling smooth operations even during periods of uncertainty, while allowing businesses to leverage new opportunities when cash is readily available.

For example, Enness was approached by a highly profitable business that had secured significant contracts at a scale beyond previous experience. Initially, the business invoice discounting provider had capped at a facility limit at approximately £1million leaving minimal flexibility to support growth and increasing working capital demands. This challenge was further compounded by the business’s long payment terms, creating a significant delay between invoicing and receiving payment. This put further pressure on the working capital of the business.

Enness sourced a lender that agreed to a facility limit of circa £3.5 million, providing the client with significant headroom to support expansion and better manage its working capital cycle. You can read the full case study here.

It is, therefore, prudent to speak to a broker who can recommend a specific provider whose product will best suit your needs and uses. For example, a business with various overseas debtors may be offered a limited advance rate to account for FX fluctuations – if not approached correctly, this can still leave a gap in a business's working capital cycles. Conversely, a business with 120-day payment terms may require a higher factor rate to compensate for the extended period over which the business's cash flow is being stretched. Enness is familiar with these situations and can help you navigate effectively, efficiently, and cost-effectively.

If you or one of your clients is exploring invoice finance, please contact us – we can help find the right lender that best suits your needs.