Invoice finance lets a business release the cash tied up in unpaid invoices instead of waiting sixty or ninety days for customers to pay. For an exporter, that wait is often longer, and it carries a currency twist, because the invoice sits in another currency until it is settled. This guide explains what invoice finance is, how factoring and invoice discounting differ, what it costs, and the points that matter when the invoices are in a foreign currency. It is part of our wider guide to business finance and currency. Medlock & Thames is a finance broker and a currency broker, so this is general information rather than advice or a recommendation of a particular facility.
What is invoice finance?
Invoice finance is a facility that advances a business most of the value of an invoice as soon as it is raised, rather than the business waiting for the customer to pay. A provider typically advances a large share of the invoice, often around eighty to ninety per cent, then releases the balance, less its fee, once the customer settles. Because the funding is secured against the sales ledger, the facility tends to grow with turnover, which is why it suits businesses whose main constraint is the gap between delivering work and being paid for it. It can be arranged with recourse, where the business carries the risk if a customer does not pay, or without recourse, where that risk sits with the provider for a higher fee.
How do factoring and invoice discounting differ?
The two main forms differ mainly in who collects the money and whether customers know. With factoring, the provider manages the sales ledger and collects payment from customers directly, which can save a smaller business the cost of its own credit control, but the arrangement is usually visible to customers. With invoice discounting, the business keeps control of its own ledger and collections, and the facility is normally confidential, so customers need not know it is in place. Larger or more established businesses often prefer discounting for that reason, while factoring can suit those that value the collections support.
How does invoice finance work, step by step?
The mechanics are straightforward. The business raises an invoice and sends it to the customer as usual. The provider advances an agreed percentage of the invoice value, often within a day, giving the business immediate cash. The customer later pays in the normal way, either to the provider under factoring or to the business under discounting. Once the invoice is settled, the provider releases the remaining balance, less its service fee and any charge on the funds that were drawn. The business has effectively brought forward the cash it was always owed, in exchange for a fee.
What does invoice finance cost?
There are usually two elements: a service fee, charged as a percentage of turnover for running the facility, and a discount or interest charge on the funds actually drawn, similar to interest on a loan. The all in cost depends on turnover, the size and number of invoices, the sector and the credit quality of the customers. The useful comparison is not the fee in isolation but the cost of the facility against the cost of waiting, including any growth or supplier discounts the released cash makes possible. A broker can place the requirement across a panel of lenders so the terms can be compared, but the facility itself is provided by the lender.
Why does it matter for exporters?
Exporters feel the cash flow gap more keenly, because international payment terms are often longer and collection across borders can be slower. Export factoring and discounting are designed for this, financing invoices raised on overseas customers and, in the case of factoring, helping with collection in another country. For a growing exporter, the ability to draw cash against foreign receivables can be the difference between accepting a large overseas order and turning it down for lack of working capital.
What is the currency angle?
An invoice in euros or dollars is worth a fixed amount in that currency, but its value in pounds moves with the exchange rate until it is paid. Financing the invoice brings forward the cash, but it does not by itself remove the currency exposure, because the final sterling sum still depends on the rate at conversion. This is where the two halves meet: a business can finance a foreign currency invoice and separately fix the rate at which the proceeds convert, so both the timing and the value are under control. We explain the currency side in FX hedging for finance directors and how a rate is fixed in how a forward contract works.
According to Medlock & Thames
In our experience, exporters who arrange invoice finance often overlook that they have fixed the timing of the cash but not its value. The receivable is financed, yet the sterling proceeds still float with the market until conversion. The businesses that get the full benefit are the ones that treat the funding and the currency as a single decision, so the cash arrives early and at a known rate, rather than early and at whatever the market happens to offer on the day.
Frequently asked questions
Will my customers know I use invoice finance?
It depends on the type. Factoring is usually disclosed, because the provider collects payment from your customers. Invoice discounting is normally confidential, so your customers continue to pay you and need not know the facility is in place.
Can I finance invoices raised on overseas customers?
Yes. Export factoring and discounting are built for invoices on overseas customers, including those in another currency. The currency exposure on the receivable is separate from the financing and can be managed alongside it.
How much of an invoice can I draw?
Providers commonly advance around eighty to ninety per cent of the invoice value up front, with the balance released, less the fee, when the customer pays. The exact percentage depends on the lender, the sector and the credit profile of your customers.
Does Medlock & Thames lend or advise?
Neither. Medlock & Thames is a finance broker that places your requirement across a panel of lenders, and the facility is provided by the lender. We explain how the options work but do not provide regulated financial advice, so the choice rests with you and the lender.
Related articles
This guide is part of our Business Finance series. For the overview, read our guide to business finance and currency. To compare other options, see trade finance and working capital finance. For the currency side, read FX hedging for finance directors and how a forward contract works. To speak to a dealer, visit our business finance page.
