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What exactly are invoice finance and factoring, and what benefits can they bring to my business?

June 12, 2014

Invoice finance and factoring are two terms you may have heard thrown around in relation to business finances – but what exactly are they?

Well, they’re not quite a loan, but they are a source of funding – and they’re secured against your outstanding, unpaid client invoices, so you might prefer to think of them as a kind of secured loan.

At their most basic, both methods allow you to unlock the value of your unpaid invoices, closing the gap between the invoice date and the due date – for a fee, of course!

Invoice finance

Invoice finance is the no-frills form of the service. This option is ideal if you handle your credit control in-house, or already have an outsourced provider working for you.

When you enlist the help of an invoice finance provider, they simply provide you with funds up to a certain percentage of your outstanding invoices – usually up to 90%.

You retain the responsibility for chasing down the payment, and for all of the other aspects of the invoicing process, keeping you in control of your company’s finances.

When the invoice is paid, you get the the balance owed to you, taking into account the amount you borrowed, and the invoice finance fee.


Factoring is a more fully featured service for companies that don’t have an in-house credit control function, but would like to make use of invoice financing.

It involves outsourcing all of your credit control processes to the factoring provider, allowing them to chase down outstanding payments to speed up the time it takes your customers to pay your invoices.

Some business owners may be reluctant to go down this route, as it means relinquishing some control on a key part of your company’s day-to-day operations.

However, in many cases, outsourcing the whole thing to a professional and experienced third-party provider can make your invoicing processes slicker, and make sure that you receive payment quicker.

The benefits invoice finance and factoring offer businesses

Several benefits of invoice finance and factoring exist for firms of different sizes.

For new start-ups, it’s a way of accessing funds within the first 12 months of business, when other forms of finance might be unavailable until your first year’s accounts have been filed.

In medium-sized firms, it’s a way to bridge the gap between invoicing and payment, unlocking much-needed funds to put towards expansion, or simply to purchasing stock.

And even in large firms, invoice finance can have its uses as a low-rate form of borrowing, with fees agreed upfront and no accumulation of interest.

Invoice finance processes

There are three stages to invoice financing:

  1. Invoice
  2. Notify
  3. Borrow

First you issue the invoice to your client or customer, then you notify your lender of the amount, and then you borrow the funds.

When the invoice is paid, you receive the remaining balance, apart from the agreed fee, which is retained by the lender.

The choice between invoice finance and factoring depends in part on whether you have in-house or outsourced credit control procedures already at your disposal – if so, you might opt for the more basic invoice financing service, rather than handing over the entire process to a factoring provider.

More on invoice finance, factoring and other funding options

You can find out more details on how invoice finance and factoring work, and the benefits they bring in the following guides;

And for more finance help and tips try some of ByteStart’s most popular funding guides;