What are the Different Types of Invoice Finance?

What are the Different Types of Invoice Finance?

Invoice finance helps your business receive payment faster. Whether you’re an established SME looking to grow, or an innovative start-up with limited working capital trying to get off the ground, invoice finance leverages unpaid invoices and unlocks an instant injection of cash into your business.

How does invoice finance work?

The finance product works by essentially selling the unpaid invoice to a lender who pays your business early in exchange for a percentage of the original value of the invoice.

The agreement offers value to smaller businesses with limited in-house bookkeeping or credit-control capabilities. As the lender has this infrastructure, the finance company will ensure the customers pay the invoice by the agreed date. There are two main different types of invoice finance: invoice factoring and invoice discounting. Both are accessible and allow businesses to unlock working capital fast.

With finance companies offering different types of invoice finance, it can be a challenge to identify which agreement provides the best value to your business. To help you achieve your business’s full potential, below we have explained the advantages of both invoice factoring and invoice discounting. Explore what both products can offer your company today:

Different types of invoice finance

What is invoice factoring?

Invoice factoring is a finance product favoured by smaller businesses. Managed by the finance company’s team of credit controllers, invoice factoring services collect payments on behalf of your business. That’s why they’re an ideal finance solution for small enterprises or start-ups that do not have in-house credit control or bookkeeping functions. Instead of having to chase customers for payment, businesses can receive working capital instantly while the finance company handles collecting the funds.

Invoice factoring is the most popular type of invoice finance available in the UK. The arrangement removes the stress of waiting for payments. The lending company takes on the responsibility of pursuing the debtor for the full cost of the invoice, removing the time and effort required as part of the credit control process. Invoice factoring gives you access to 100% of the invoice’s value instantly as opposed to waiting days, weeks, or potentially months for creditors to complete payment.

What is invoice discounting?

Invoice discounting differs from invoice factoring as your company retains responsibility for credit control functions. It is generally favoured by established businesses with in-house teams that have experience in credit control and bookkeeping. 

If your company has the existing infrastructure, invoice discounting allows you to receive invoice payments instantly while still retaining full control of the payment process and maintaining a direct customer relationship.

Variants of invoice factoring and invoice discounting

  • Disclosed – Each time an invoice is issued, the finance company advances the funds to your business and the debtor is aware that an invoice finance lender is part of the process.
  • CHOCs – The client handles their own collection (CHOC) invoice finance agreements that are disclosed to the debtor, however, your business retains credit control instead of the lender.
  • Confidential – The arrangement with an invoice finance lender is kept confidential from the debtor but your business still has quick access to funds.
  • Recourse – This agreement still involves your company selling the invoice to the lender, however, you will be liable for any unpaid debts.

Is invoice finance right for your business?

The right invoice finance agreement can unlock the full potential of your business. Spending your time chasing payment from debtors is valuable time you’re not investing in the aspects of your business that matter most. The parts of your organisation that can inspire growth, increase profits, and help you achieve your goals. Using invoice factoring takes away the responsibility of chasing debtors for invoice payments, so you can unlock working capital fast, without the stress.

Invoice finance is a smart solution for large businesses too, not only SMEs and start-up companies. If your organisation issues a small number of high-value invoices, one client's missed payment can have a huge impact on your business. Invoice finance removes this risk. With the support of a lender, your business ensures you receive payment on every invoice instantly, instead of waiting for the debtor to release funds.

Small businesses trying to get off the ground can be hugely affected by limited working capital. A missed payment on an invoice, even for a relatively low amount, may disrupt your operations, preventing your organisation from investing in new members of staff or valuable equipment. SMEs and start-up enterprises may also not have the in-house team or capacity needed for credit control. Working with invoice finance lenders ensures your corporation never loses a payment without having to invest time and money in chasing debtors.

Why use invoice finance?

  • Quick Access To Funds – Unlock working capital instantly. Your business invoices don’t have to sit unpaid for weeks and potentially months. Invoice finance allows you to sustain cash flow in your business by paying off invoices instantly.
  • Reliable Cash Flow – Instead of waiting for payment from customers, or potentially missing out on a payment entirely, work with a lender to access funds as fast as possible. 
  • Support Chasing Payments – Choose whether your debtors know you're working with an invoice finance company or not and ensure you never miss an invoice payment. You don’t have to invest time and money in chasing unpaid debts. 

Get started with Millbrook Invoice Finance

At Millbrook Business Finance, we are finance experts who can source the right invoice finance agreement for your requirements. Every organisation and industry is unique. Our team will help you discover a bespoke invoice finance arrangement from our portfolio of lenders featuring the lowest interest rates in the UK. 

Release working capital instantly today, call us on 0333 015 3301 or visit our contact page to enquire further.