Invoice finance for limited companies
Your company has done the work and sent the invoice, but the customer has not paid yet. Meanwhile, wages, materials and other bills still need paying.
Invoice finance lets your business access some of the money owed on unpaid invoices before your customers pay. The provider checks which invoices it will accept and charges for the service.
How the money moves
Imagine you send a business customer an invoice for £10,000, payable in 60 days. You need some of that money sooner.
Here is a simplified, fictional example:
| Stage | What happens |
|---|---|
| You send the invoice | Your customer owes £10,000. |
| The provider accepts it for funding | You receive £8,000 before the customer pays. This early payment is called an advance. |
| Your customer pays the £10,000 | The provider recovers the £8,000 already advanced. |
| The balance is settled | Assuming total charges of £200, you receive the remaining £1,800. |
Your business receives £9,800 altogether: £8,000 earlier and £1,800 later. The £200 difference is the assumed cost.
These figures are an illustration, not a quote. The example assumes full customer payment, all charges deducted at the end and no other adjustments. Actual amounts, charges and payment arrangements vary.
The benefit is earlier access to money owed to you. It does not increase the value of the sale.
Factoring or invoice discounting?
These are two common forms of invoice finance. One important difference is who follows up with customers and collects payment.
| Invoice factoring | Invoice discounting | |
|---|---|---|
| Who handles collections? | The provider usually manages collections. | Your business usually keeps that responsibility. |
| Will customers know? | They will usually know the provider is involved. | The arrangement is often confidential, but check the terms. |
| What should you ask? | How will the provider communicate with our customers? | What records and payment-account arrangements must we maintain? |
Neither is automatically the better choice. Think about whether you want help collecting payments or prefer to keep that work within your business.
Understand the charges
You may see two terms in a quote:
- Service fee: the charge for managing the arrangement and any agreed services.
- Discount charge: despite the name, this is a funding cost, similar to interest. It commonly depends on how much money you use and for how long.
Ask the provider to explain the total cost using your own invoices and payment timings. Check for minimum charges, additional fees and the cost of ending the agreement.
Also ask what happens to charges if a customer pays later than expected.
Check which invoices are covered
Some arrangements cover a broad set of invoices. Others cover selected customers or individual invoices. You may hear these called selective invoice finance or single-invoice finance.
Ask:
- Which customers and invoices would you accept?
- Do we need to include all our invoices, or can we choose?
- What happens if one customer accounts for a large share of what we are owed?
- What happens if a customer disputes an invoice or pays late?
- If a customer never pays, what would our company have to repay?
Do not assume that the provider takes on the loss if a customer fails to pay. Check whether any protection against non-payment is included, what it covers and what remains your responsibility.
What should you have ready?
Start with a list of unpaid invoices showing the customer, amount, invoice date and payment due date. Note any disputes or overdue payments.
Be ready to explain what your company sells and how customers normally pay. The provider may also ask for company accounts and evidence that the goods or services were supplied.
Our Eligibility and preparation guide explains what CapSage asks and what a provider may request afterwards.
Is the funding need linked to your invoices?
If you need to cover the gap between invoicing customers and receiving payment, this is a route worth understanding.
If you need money for a separate project, also read Business Loans. If you are buying a vehicle or equipment, explore Asset Finance.
Find a funding provider
Tell CapSage about your company and what you need the money for.
If we identify a suitable provider, we’ll introduce you so you can discuss your needs. The provider decides whether to offer funding.
You don’t pay a fee to use CapSage’s assessment and matching service.