What is Invoice Finance?

"The most concise way to tackle the "What is Invoice Finance?" question to conclude that it is thriving. There are some primary explanations for this, as well as several main events have changed the way small to medium-sized companies borrow over the last couple of decades.



For quite a while now, conventional lending has become more difficult for younger and smaller companies to obtain. Customers will pay quite slowly throughout the pandemic, and little is done to alleviate the constant pressure on SMEs to continue paying salaries and suppliers. To sustain their cash flow, commercial borrowers need an easy and usable, cost-effective way. The cost of borrowing is dependent on risk for all lenders, and the freeing up of cash in outstanding invoices represents a reasonably low risk prospect.


What is financing for invoices, and how does it operate?

Invoice funding is a simple way to borrow funds that are protected against the value of your unpaid invoices. A lender advances a percentage of the invoiced sum to your company (usually about 90 percent) until an invoice is raised, and certain providers ensure payment within twenty-four hours.

Maybe you and the lender will perform credit management, depending on the type of invoice financing you register for, and when the invoice is charged by your client, you will earn the remainder of its value, minus the financing charge.


Discounting invoices versus factoring in invoices

Just in terms of who is liable for receiving payments do the two key forms of invoice financing - invoice discounting and invoice factoring - vary. There are two key considerations to consider for organizations when selecting one of the different solutions; do we want clients to know that we are using the service? Do we want credit management to be outsourced?

The easiest of the two funding structures is invoice discounting. You borrow on the invoice value but maintain leverage over the pursuit of payment. That being said, with invoice factoring, the finance company conducts credit management, so the clients will know that you have outsourced the project.

  • Both discounting and factoring operate through advancing a portion of the unpaid bill, generally around 90% of the value of the invoice, and then the remainder is resolved until the invoice is paid in full by your client.
  • In this region, many lenders would suggest that your primary source of income needs to be from B2B sales, not B2C.
  • For almost all SMEs, from existing companies to start-ups and new projects, invoice financing is applicable.
  • Lenders would also state that an owner or director owns equity in a property in the case of brand-new companies.


How does factoring function on invoices?

It works to boost cash flow and make it more predictable.

Companies can outsource control of credit and focus on output. The investment firm takes care of payment hunting.

Pros of factoring invoices

  •  For smaller firms, it may work well to have the finance company handle credit management and open up time to create fresh leads or income sources.
  • Because by handling the sales ledger, the financial company eliminates its risk, the bar for obtaining this form of invoice financing is lower. A turnover-related limit is set by most businesses.

Cons of factoring invoices

The service isn't private. Many consumers may disagree with the fact that you outsource credit management, specifically if you are a smaller company with an extremely close customer base.

The invoice factoring credit control feature costs funds, so borrowing costs are also higher than with invoice discounting.


How will discounting function on invoices?

It enables companies to better forecast cash flow and frees up much of the money held in unpaid invoices instantly.

The system is completely private, and your clients may not know that you are using invoice financing. You maintain your own credit control.

Pros of discounting an invoice

  • Invoice discounting is private, so you won't affect any clients because it gives the same financial advantage.
  • You figure out your own way of credit management, which is great if you have multiple processes for long-term or loyal and trusting customer.
  • The cost of financing, as with invoice factoring, does not have a credit management feature.
  • You don't get locked into an invoice discount deal, because when it operates, you're able to finance a single invoice.

Cons of discounting an invoice

  • Discounting come at a higher bar for admission, with a minimum turnover in the hundreds of thousands of pounds stated by some financiers.
  • Lenders with invoice discounts may want to review the credit management capabilities and procedures until they approve borrowing.


What are the invoice financing costs?

That varies depending on whether you prefer factoring or discounting and as stated above, due to the fact that the lender takes care of credit management, the costs for invoice factoring appear to be higher.

Typical invoice financing rates are between 0.5 percent and 5 percent of the value of the invoice, but the credit rating and other variables may affect the rate you are given, as with all loans. The size of the invoice that you choose to fund will also influence the cost. Larger sums appear to attract lower payments, whereas for lower-value invoices, the reverse is true.


How does funding for invoices work?

The flexibility of the arrangement is one of the major draws of invoice financing. As planned, the company raises invoices, but then you have to let the financier know. They'll pass on a percentage of the value until they have all the information. That, varying on the invoice financing provider, can take anywhere from twenty-four hours to a week.

If it is a factoring plan, the lender will update according to their practices with credit management. You will then continue as per the contract. You can pursue payment as usual if you've signed off on a discounting arrangement. You will collect the balance of the money from the financier when the invoice is paid, who will subtract their fee. Repeat applications are simple and fast to manage once you have selected and been accepted by an invoice finance provider.


Could my company be benefited by invoice financing?

The prominence of invoice financing has increased because it is a relatively easy way to preserve a healthy cash flow in many cases. However, as part of the wider cash flow forecasts and preparation, it's smart to use it. It is not wise to be dependent on any form of finance. Even, invoice financing can be a cost-effective option for paying salaries, vendors, and even retail property leases as a substitute during times when working capital is limited.

At MNV Associates we offer multiple resources that will benefit your business. By utilizing our high caliber experts, we surely can help you anywhere in the UAE. If you are looking for assistance, contact our office at +971523750920 or schedule an appointment with our top-notch advisors.