Invoice finance turns unpaid invoices into cash now, but it comes with a contract worth reading first

An invoice is a promise that your customer will pay you later, often thirty, sixty or ninety days after you've delivered the work. Invoice finance turns that promise into cash before the payment date arrives, by having a provider advance you money against the invoice itself.

The order the money moves in

The transaction is not a single event. It runs as a fixed sequence, and each step depends on the one before it.

1. You raise the invoice and send it to your customer in the ordinary way.
2. The provider advances you a percentage of the invoice value, usually within a day or two of seeing it.
3. Your customer pays the invoice when it falls due. Depending on how the facility is arranged, they pay the provider directly, or they pay you and you pass the payment on.
4. The provider releases the remaining balance to you, minus its fee for the advance.

Whether your customer pays the provider directly or pays you changes what your customer sees of the arrangement, but the order underneath stays the same: advance first, collection second, balance released last.

The fee is charged against the period the advance is outstanding, so how quickly your customer actually pays affects what the facility costs you to use each time. That's worth working through for your own payment terms before you commit to a facility. The same four-step structure is used to describe every other finance instrument on this site, so once you've read it here you can read any other entry the same way.

A facility that advances cash against invoices works well until the receivable behind it turns out to be worth less than expected, or the money is owed by too few customers, or the provider's own collection activity reaches someone you still have to deal with next month. These are the three places the arrangement most commonly goes wrong, and each one is worth checking before you sign.

Too much owed by one customer

A provider advances against your invoices as a pool, but it rarely treats every invoice in that pool the same way. Where one customer accounts for a large share of what you are owed, the provider will often cap how much it will advance against that customer specifically, or exclude invoices above a certain share of the book altogether. If that customer is late paying, disputes an invoice, or becomes insolvent, the funding available to you can drop sharply and all at once, because the facility was never spread across enough payers to absorb the loss of one. A business trading mainly with a small number of large customers should ask, before signing, what concentration limit applies and what happens to the facility if one customer's invoices are excluded.

Credit notes and disputes reducing what you are owed

The amount a provider has advanced against an invoice assumes that invoice gets paid in full. When a customer raises a dispute, returns goods, or is issued a credit note, the receivable shrinks below what was advanced against it. The difference is called dilution, and most facilities give the provider the right to reclaim it from you, either by deducting it from future advances or by invoicing you directly for the shortfall. A business whose trade involves regular returns, rebates or disputed quality claims will see this more often than one with straightforward, undisputed invoicing, and it is worth asking what the facility does with dilution before relying on the advance as settled cash.

What happens when the provider contacts your customer directly

Some facilities are disclosed, meaning the provider collects payment directly from your customer. Your customer then learns that your invoices are financed, and the provider's own collection practice, including how it chases late payment, becomes part of how your customer experiences dealing with you. Where that collection is more persistent than you would be yourself, it can affect a relationship you intend to keep. This is a question worth putting to any provider directly: who contacts the customer, under what name, and at what point in the payment cycle.

Invoice finance is defined in full, alongside the other instruments it is often compared with, in the finance instrument reference.

Minimum-term contracts and notice periods

Most invoice finance agreements run for a minimum term, and the contract renews automatically unless you give notice inside a set window before that term ends. Miss the window, or give notice late, and you're tied in for another term even if the facility has stopped being useful to you. The notice period and the renewal window are set by the provider, so they're worth reading before you sign.

Leaving before the minimum term is up usually carries a cost of its own. Providers commonly charge a fee tied to what you'd otherwise have paid in facility fees for the rest of the term, so ending the agreement early doesn't simply stop the charges, it can bring forward a version of them.

The claim the provider holds over your book debts

To secure what it has advanced you, the provider takes a debenture, a legal charge over the assets of the business. In invoice finance that charge usually covers your book debts, meaning the invoices themselves and the money your customers owe against them, and it's sometimes written wider to cover the business's assets as a whole.

Once the debenture is registered, the provider's claim to those debts sits ahead of other creditors who haven't secured a charge of their own. That matters if you later want to move to a different provider. The first debenture generally has to be released before a new one can be registered against the same debts, so switching provider is rarely something you can do the same week you decide to, even when the new terms are better.

What to check before you sign

• How long the minimum term runs, and when the renewal window opens and closes.
• What notice you have to give to end the agreement, and in what form it has to be given.
• What it costs to leave inside the minimum term, and whether that cost is fixed or tied to the fees remaining on the contract.
• Whether the debenture covers only your book debts or the business's assets more widely.
• What has to happen to the existing debenture before the facility can move to another provider.

Each of these sits in the agreement itself, and reading it before you sign is the point at which it's still your choice. The instrument's full definition, including what it typically requires and where it goes wrong beyond the exit terms, is set out on the finance instrument reference page.