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• 13 Jul

  Invoice Financing Explained In Layman’s Terms

  

  Understanding how receivables financing products work can be complicated. Therefore, invoice financing is explained in this post, in layman's terms.

  Invoice Financing Explained

  To put it in a nutshell, invoice financing releases cash against invoices that customers haven't yet paid. There are all sorts of additional add-on services that are optional, but that is the main purpose of the facility. This can dramatically improve the cash flow of a business.

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  Waiting To Get Paid

  In the UK, credit invoices are typically issued on 30-day terms (although this varies). This means that you wait at least 30 days before the customer pays. If you have already had to buy raw materials, pay bills or staff wages - you have to bear that cost until you get paid. This is where these services can help.

  Submitting Your Invoices For Prepayments

  When you raise your invoice, you immediately submit it to your funder (this can happen in the background directly from your accounting package). Or, with some facilities, you can pick the invoices you want to be funded so that you can control your costs very closely. The funder will then make what they call a "prepayment" available against that invoice. This could be between 70% and 100% of its value (less the charge to use the service). The percentage is normally determined by the sector that you work within. You get any residual balance once it's paid.

  Multiple Invoices & Unlocking Your Sales Ledger

  Of course, most businesses are raising multiple invoices, such that they have a sales ledger of outstanding unpaid accounts. These can all be used to raise this type of funding (subject to their age and the nature of your customers). This means that you can initially release prepayments against your sales ledger, unlocking the cash that is tied up in that asset. This is money that you would have received in due course (when your debtors paid) but you are accelerating the process to improve your cash flow. You can learn more about improving cash flow from our free cash flow guide.

  For more detailed explanations, pricing and product details please see our invoice financing guide.

  By Glenn Blackman