Invoice financing: everything you need to know

2 Jul



Maintaining a healthy cashflow is as vital as air when it comes to improving your business's operations and fostering growth. A solution more and more businesses are turning to is invoice finance. Whether you’re an SME aiming to better manage seasonal fluctuations, or a corporation wanting to free up working capital - invoice finance offers a versatile solution to unlock funds trapped in your outstanding invoices.

In this article, we’ll explore the essentials of invoice finance, covering its core principles, the benefits, what to consider, and practical insights on choosing the right invoice finance partner. If you want to improve your cashflow with our tailored invoice financing solutions now - contact our team today to discuss how we can support your business growth.

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What is invoice finance?

Invoice finance is a practice where you sell your accounts receivable (invoices) to a third party for a small fee. This contrasts with traditional financing methods, which usually involve lengthy loan processes and rigid credit requirements.

Invoice finance eases cashflow stresses over the business year by providing immediate cash based on the value of outstanding invoices.

Benefits of invoice finance

Enhanced cashflow

Steady cashflow is the lifeblood of any business. It empowers innovative companies to take advantage of new opportunities that arise from new market shifts.

And with invoice finance, you can inject crucial liquidity into your business, converting unpaid invoices into immediate working capital. Improved cashflow also enables you to maintain operations, pay employees, and invest in new projects without the frustration of waiting on customer payments.

Facilitating growth and expansion

A steady cashflow gives you the ability to pursue growth opportunities. Because businesses are no longer constrained by the gap between delivering a product or service and receiving payment. This immediacy allows you to take on larger projects or orders, explore new markets, and invest in research and development without the financial strain that SMBs and enterprise businesses have traditionally endured.

‍Improving financial resilience

Broader economic uncertainty can impact an SMB and enterprise businesses' financial stability more profoundly than it does with larger enterprises. Invoice finance offers a buffer against this uncertainty, providing you with a constant source of funds even in the most challenging times.

By converting sales into immediate cash, SMBs and enterprise businesses like yours are better equipped to manage economic fluctuations and maintain a steady course through turbulent times.

Increasing operational flexibility

Fast access to funds through invoice finance empowers businesses to become more agile and adaptive. This flexibility is crucial in today's hyperactive and competitive market, where an ability to respond quickly to change, customer demands, or unexpected expenses can determine business success.

Empowered by this newfound agility, businesses can make quick decisions and take direct action with confidence.

Improved business relationships

Timely payments are critical in building and maintaining trust with your suppliers and customers. Invoice finance ensures you have the funds to meet the most stringent deadline commitments.

Demonstrating such reliability strengthens relationships with your buyers and opens doors to new opportunities and better terms with new suppliers and partners.

‍Navigating the digital landscape

Technological advancements have made invoice finance more accessible and efficient than ever. Digital platforms enable quick and easy management of invoices, streamlining the process and reducing administrative overhead.

This technological integration means you can easily access financing solutions without unnecessary burdens on your time.

‍Looking to the future

Invoice finance can have long-term benefits for small businesses. Beyond immediate financial reassurance, it lays the groundwork for sustainable growth and stability, allowing you to plan for the future, invest in your workforce, and explore new ventures.

Experience the benefits of invoice financing first-hand. Contact our team today to discover how our tailored solutions can provide the flexibility and support your business needs.

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What are invoice finance costs?

Invoice finance costs are the fees charged by finance providers for their services.  Businesses work with financing providers to increase their working capital by advancing their accounts receivable.

In return, they agree to pay a small fee, which is typically charged as a percentage of the value financed by the provider.

Example of invoice finance fees

Exporter Ltd is owed £10,000 by Importer Ltd after invoicing it for payment with 90-day terms.  However, Exporter Ltd needs cash now, so it submits the invoice to a financing company which agrees to pay 80% of the invoice value (£8,000) to Exporter Ltd instantly. They agree to pay a service fee. Upon agreement, a financing company pays the £8,000 to Exporter Ltd within as little as 48 hours of the relevant signed documents being approved. 

When the importer pays the outstanding £10,000 invoice amount, Exporter Ltd repays the borrowed amount to the lender, plus the pre-agreed fee.

What can impact invoice finance costs?

Various factors impact the fee a finance provider will charge for invoice funding services, including:

  • Length of finance period - fees increase as the finance period increases (e.g., from 30- to 90 days).
  • Finance amount - lenders will charge a higher fee as the finance amount increases (e.g., from $10,000 to $100,000).
  • Type of invoice financing agreement - as this dictates the risk to the lender (e.g., recourse or non-recourse agreement).
  • Number of invoices processed - lenders may offer discounted fees for businesses that process multiple invoices.
  • Risk to the lender - determined by background checks on the business and customer. The higher the perceived risk of financing, the greater the fee applied.
  • Relationship with the lender - lenders may offer reduced fees to long-term, trusted customers.

Invoice finance costs: key takeaways

Invoice finance costs can seem complicated as they may vary between providers and the exact agreement terms.

Here are the key points to remember:

  • Invoice finance fees are typically charged as a percentage fee of the amount borrowed.
  • This percentage fee varies depending on contextual factors including the amount borrowed and the risk to the lender.
  • Invoice discounting and invoice factoring are similar but distinct services and therefore involve different costs and fees.
  • Invoice finance services may include additional fees including application, background check, and late and termination fees.

What to consider when selecting an invoice finance partner

Selecting the right invoice finance partner is crucial. Here at Stenn, we have a proven reputation in the field and offer exemplary customer service. However, other factors need to be considered.

When assessing potential solutions, look at the following:

  • Whether the vendor is prepared to finance businesses engaged in international trade
  • How many countries the vendor can operate in
  • The simplicity of the approval process. Look for a vendor that uses automation technology to ensure the process is fast and requires little documentation
  • Whether the vendor will force you to repay your finance if the buyer defaults
  • The size of the financing fees
  • How long it takes for the vendor to finance invoices? Some will deposit funds within hours, others after weeks (or even months)
  • How much of the invoice is advanced. Whereas some will advance at least 90% of invoice face value, others typically advance 70-80%

‍Why invoice finance is beneficial for SMB - Enterprise businesses

Invoice finance provides a powerful solution to a common problem – it will resonate with businesses of any size. 

Here’s how:

Instant access to cash: Cash is a particularly urgent commodity when a new business is still finding its feet.

As invoice finance can lead up to 80% of an invoice’s value being deposited in your account in as little as 48 hours, your only concern will be securing enough orders in the first place, whilst the vendor assumes responsibility for getting paid for orders.

Zero collateral required: invoice finance involves selling an invoice to a third-party vendor. Once that sale is made, the deal is done. You incur zero debt, meaning there is zero risk to any of your business assets.

No chasing invoices: Many businesses soon discover that chasing invoices is one of the most stressful aspects of running a successful enterprise. Aside from the time needed to do it, it can lead to difficult conversations with the buyers you rely on.

Once you’re approved for invoice finance, the vendor takes ownership of the invoice.

What is the invoice finance approval process?

A typical approval process looks like this, though this does vary depending on the provider:

  1. Having chosen a provider you trust and one that major players also trust in the finance world, you'll create an account on their website;
  2. With your account live, you’ll be asked to enter your buyer’s name to assess its financing limit;
  3. Next, you’ll upload the invoice that needs to be financed on the platform, together with any shipping document(s), such as a Bill of Lading, Air waybill, or CMR documents.

At this point, the provider will decide whether or not to approve the invoice and shipping documents.

  1. Assuming your invoice and shipping documents are approved, you will be sent two documents – an Agreement from the provider and a Notice of Assignment for the buyer.
  2. You sign the Agreement, and both you and the buyer sign the Notice of Assignment.
  3. Within days, up to 90% of the invoice’s face value minus any pre-paid amount is paid directly into your bank account. The remaining 10% is held in reserve to cover the provider’s fees and potential offsets or late payment charges.
  4. On the invoice's due date, the buyer pays the invoice to your invoice finance provider, who in turn pays you the outstanding money owed minus the provider’s fees.

‍How can invoice finance help businesses underserved by traditional banks? 

Here are three ways invoice finance helps underserved SMBs to thrive.

1. Enhances cashflow

The primary advantage of invoice finance for SMBs lies in its ability to boost cashflow. Unlike traditional loans that may take weeks or months to secure, the facility offers a quick solution to convert unpaid invoices into readily available cash. This immediacy is crucial for underbanked businesses, which often struggle with the painful gaps created by long payment terms of 30, 60, 90, or even 120 days.

Invoice finance allows SMBs and enterprises to access the cash trapped in invoices in as little as 48 hours, providing you with the liquidity needed to procure raw materials, and place large orders to pay taxes or wages.

This enhanced liquidity helps maintain day-to-day operations and allows you to seize growth opportunities that require urgent funding.

2. Provides options over traditional financing

For many underbanked SMBs and enterprise businesses, gaining access to traditional banking facilities can be daunting. High credit requirements, extensive paperwork, and lengthy approval processes often put these options out of reach. It is here that invoice finance arises as a more accessible alternative, relying on the creditworthiness of your customers rather than your own. Moreover, invoice finance reduces the reliance on traditional bank loans, which can be markedly beneficial in times of economic uncertainty, when banks tighten their lending criteria.

By leveraging your accounts receivables, you can access the funds you need without risking the collateral typically required by banks.

3. Supports growth and stability

Invoice finance is not just a tool for bridging cashflow gaps; it's also a catalyst for growth. By providing immediate access to funds, you can take on larger projects or orders without worrying about how you will finance their upfront costs. This ability to accept bigger contracts or expand to new markets can be a game-changer for any SMBs and enterprises looking to scale. Also, the stability that comes with improved cashflow can be transformative in itself. You can plan with certainty, or look to enhance your product offerings.

Demonstrating effective financial management and a solid foundation for growth, this added stability will also make your business more attractive to future investors and partners.

Why is invoice finance more beneficial for trade businesses than bank credit?

Data from ECI Partners highlights that trade businesses have found it increasingly difficult to access finance from high-street banks, with two-thirds reporting more difficulty compared to previous years.

This issue is compounded by the fact that even when funding is secured, the cost of debt remains high due to elevated interest rates.

This is where invoice financing is beneficial.

Easier qualification

Across traditional lending formats, securing a loan is becoming tougher than ever. Trade businesses are experiencing a widespread increase in rejected applications across Europe for all loan categories.

SMEs must often rely on external financing to fund their operations, expand their businesses, and invest in new projects. But when loan applications are frequently rejected, SMEs face a lack of access to the necessary capital to grow and thrive. This is particularly concerning for budding SMEs who may have an even tougher time securing a loan due to a limited credit history or a lack of assets. These businesses may be considered too high a risk for traditional vendors since there is no collateral to offset this risk.

In these instances, invoice financing provides businesses with a more assured way to gain financing when they need it most. Compared to bank loan applications, applying for invoice financing is straightforward. Banks typically have extensive documentation requirements, including financial statements, business plans, and other supporting documents.

By contrast, invoice financing applications may focus primarily on unpaid invoices, shipping documents and the creditworthiness of the customer's buyer, making the application process much simpler for businesses that are not yet established enough to meet the strenuous requirements of a high-street bank. 

Improved relationships

By using invoice financing, businesses can offer more flexible payment terms to their customers. Instead of demanding payment upfront, businesses can offer longer repayment terms while still receiving a cash injection from a third-party vendor. This flexibility can help businesses forge long-lasting relationships with customers and build trust, making it easier to negotiate future deals and encourage repeat business, which is particularly important for international buyer-supplier relationships.

Invoice financing not only helps SMEs foster positive relationships with customers. It also improves relationships between buyers and suppliers. This buyer/supplier relationship is crucial for smooth operations and success of a business, as it facilitates a reliable supply chain, competitive pricing, and favourable terms. Just as a business prefers to receive payments promptly, so too do its suppliers. With the funds obtained through invoice financing, businesses can meet repayment deadlines on time.

This payment helps build vendor confidence and promotes long-term partnerships between supplying and buying businesses. Additionally, buyers benefit from the assurance of a steady supply of goods and services, contributing to overall business stability and growth.

Faster access to funding

Businesses typically must rely on customers to settle their invoices promptly to ensure steady cashflow. This can take up to 120 days for international suppliers that offer deferred payment options, which may have negative repercussions should businesses need working capital to fulfill their ongoing financial obligations. Invoice financing services provide SMEs with a solution to this dilemma. By selling outstanding invoices to a third party, businesses can get immediate access to liquid capital without having to wait months for payment from the buyer.

Additionally, businesses can get faster access to funding through simpler and speedy application processes. As mentioned earlier, bank loan applications can be complicated and long-winded. Waiting to be approved for a business loan can take several weeks or longer, which could put SMEs in a difficult position if there are outstanding urgent bills.

Invoice financing applications typically have a quicker approval process compared to bank loan applications. The expedited process allows businesses to access funds almost instantly, stabilising cashflow and enabling businesses to overcome temporary cash shortages.

Discover why trade businesses are choosing invoice finance over traditional bank credit. Speak with our team today and learn how our tailored invoice financing solutions can drive your business forward.

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Is invoice discounting the same as invoice finance?

Invoice discounting - or 'recourse financing' - is a specific type of invoice financing with one key difference. With invoice discounting, the supplier receives a cash advance for the invoice but retains responsibility for chasing the buyer for payment. The supplier has no protection against non-payment from the buyer. 

The financing process is the same, with the vendor claiming a service fee when the invoice is settled. However, the supplier will be responsible for reimbursing the finance provider should the buyer not pay.

Why is international invoice finance used?

Invoice finance solves several problems common to international trade. suppliers (Exporters) receive an upfront payment when goods are shipped. But buyers (Importers) can still benefit from generous deferred payment terms from those same suppliers, allowing them time to receive, distribute, and sell those goods before paying the invoice.

In the case of non-recourse factoring, the risk of buyers not paying is taken on by the invoice factoring company. Invoice finance is widely used in domestic trade deals and is becoming increasingly popular in cross-border trade. Figures from FCI (the global representative body for cross-border factoring) show that:

Invoice finance is a highly flexible option for Exporters and allows them to choose which invoices to finance and when. This flexibility and the ability to mitigate payment risks through non-recourse factoring make it an attractive financial solution for international trade.

Three ideal scenarios for international invoice finance

While many companies rely on invoice finance (also called account receivables financing) for everyday cashflow needs, three examples stand out in which international invoice factoring can be especially beneficial.

1. Rapid growth

Fast-growing companies often have capital needs that exceed their bank lines of credit or loans. For these firms, invoices are assets that can be quickly converted into cash without affecting banking arrangements. Invoice financing is a straightforward way for exporters to get instant working capital for their business needs. This is especially beneficial for companies operating in sectors with high seasonal demand, like apparel and holiday products.

Seasonality can cause significant fluctuations in a company's cashflow, inventory and profitability, all of which can make a bank decide against lending money. Invoice financing solves this problem by providing instant cash during peak times.

2. Turnaround situations

Companies often find themselves in a 'turnaround' phase, in other words, they’re returning to growth after a period of disruption. Even though some firms in turnaround phases might have ambitious growth plans they may not always have the means to secure a bank loan to finance them. 

Invoice finance can be a lifeline in such situations, providing a vital cash supply during recovery periods when other financing options may not be available. Applications for invoice finance are approved depending on the Importer's credit rating, not the Exporter's.

3. Trading with countries outside of bank jurisdiction

Since the 2008 financial crisis, banks have been stepping back from international trade activities. The pandemic has also increased the strain on cross-border trade measures. Lending regulations have become more restrictive, there is costly and time-intensive paperwork to complete, and geopolitical risks have become more volatile.

These issues have contributed to the $1.5 trillion (USD) trade finance gap which has indirectly affected firms in the middle market. These companies turn to invoice financing when their bank will not support sales to a country it lists as 'ineligible'. Therefore, invoice finance has become a suitable option for Exporters trading globally, especially those located in emerging markets with poor banking facilities.

How to apply for invoice finance with Stenn

You can begin your finance application with just your name and email address and then return to it later with more information, but it will speed things up if you have the following details available:

  • Your company information
  • Your buyer's company name
  • Any invoice(s) you want to finance
  • Transport documents, if applicable
  • Your company's bank details
  • Name of the authorised signatory for your company
  • Name of the authorised signatory for your buyer's company

Boost your cashflow with invoice-based finance solutions from Stenn

Here at Stenn, we’re a proven provider of trade finance solutions, specialising in revenue-based and invoice-based finance.

We help improve cashflow and reduce risks, offering tailored financing options with dedicated support to meet your needs.

Get in touch today to discuss how our invoice-based finance solutions can fuel your business growth.

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About Stenn

Since 2016, Stenn has powered over $20 billion in financed assets, supported by trusted partners, including Citi Bank, Goldman Sachs, HSBC, and Natixis. Our team of experts specializes in generating agile, tailored financing solutions that help you do business on your terms.

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