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An introduction to invoice financing

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Invoice finance or invoice discounting is a form of short-term borrowing often used to improve a company’s cash flow.

A business will enter into an agreement with a finance company—this will allow the business to borrow a percentage of the outstanding sales invoices they have.

For example—if a business has £1,000,000 in outstanding invoices, and the finance company will lend them 80% of this, they can borrow £800,000. The invoices act as a security for the finance company.

When the business raises new invoices and customers pay their invoices, the amount that can be borrowed will change to make sure the maximum is always 80% of the outstanding invoice balance, or whatever has been agreed with the finance company.

The finance company will often charge a fee for its service along with interest on the amount the business borrows. This is usually an expensive way to borrow money.

The finance company may also refuse to lend against some invoices they see as being a bad credit risk. For the business, it means they have instant access to funds to help their cash flow. They’ll only pay interest on the amount they borrow, and their suppliers do not need to be aware of the agreement.

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