What is receivables finance?

Last updated on 4 April 2024

In an increasingly dynamic and interconnected world, businesses are continuously exploring effective solutions to optimise their cash flow, decrease financial risk, and increase growth. Receivables finance is one such financial tool gaining significant traction within UK companies for these very reasons. This article is intended to shed light on this important business finance mechanism.

Compare business finance What are you looking for?


In partnership with Nerdwallet

Definition and mechanism

Receivables finance, also known as invoice finance, is a form of asset-based lending that allows businesses to leverage their unpaid invoices to secure immediate funds. Instead of waiting for customers to pay within their normal credit terms, businesses can unlock the value tied up in those outstanding payments, bolstering their cash flow position and facilitating smoother operations.

In a typical receivables finance agreement, a business sells its unpaid invoices to a financial institution, often a bank or a specialised finance company. The financier typically advances 80-90% of the invoice value immediately, with the remaining balance, less fees and interest, paid once the customer settles the invoice.

Types of receivables finance

There are two primary types of receivables finance: invoice factoring and invoice discounting.

Invoice factoring

Factoring involves a business selling its invoices to a finance company (the ‘factor’), which then takes on the responsibility of collecting payments from the business’s customers. This setup can be beneficial to businesses that prefer to outsource their credit control function to focus on core operations.

Explore business banking

Revolut Business
✓ Business Current Account
✓ Award-Winning Mobile App
✓ Quick & Easy Application Process
Pricing Trial period Contact

Tide Business Bank Accounts
✓ Free, Plus, or Pro Account
✓ iOS & Android Mobile App
✓ Upload & Auto-Match Receipts
Pricing Trial period Contact

Card One Money
✓ No Credit Checks
✓ Simple Fees
✓ Up to 3.5% Cashback
Pricing Trial period Contact

ANNA Money
✓ Apply in 10 minutes
✓ Bookkeeping & Payroll Tools
✓ User-Friendly Mobile App
Pricing Trial period Contact

Co-Op Business Banking
✓ Business Current Account
✓ Online, App & High Street Banking
✓ Quick & Easy Application Process
Pricing Trial period Contact

HSBC Business Banking
✓ Business Current Account
✓ In-Branch, Online & App Banking
✓ FSCS Protected
Pricing Trial period Contact

Metro Business Banking
✓ Business Current Account
✓ High Street Presence
✓ FSCS Protected
Pricing Trial period Contact

Mettle Business Banking
✓ Business Bank Account
✓ Online & App
✓ Quick & Easy Application Process
Pricing Trial period Contact

Monzo Business Banking
✓ Business Current Account
✓ Dedicated mobile app experience
✓ FSCS Protected
Pricing Trial period Contact

Virgin Money
✓ Business M Account
✓ In-Store, Online & App Banking
✓ Insights & Forecasting Platform
Pricing Trial period Contact

Invoice discounting

Invoice discounting operates similarly, but with a key distinction: the business retains control over the collection of payments from its customers. This service is often confidential, meaning customers are unaware of the finance arrangement. Invoice discounting is particularly suitable for businesses with strong credit control procedures in place.

The benefits

Receivables finance offers a range of benefits. The most evident is improved cash flow. Businesses get access to cash tied up in their invoices promptly, which can be used for staff salaries, supplier payments, debt repayment, investment in growth opportunities, or any other business requirements.

This method of financing is also flexible, with the funding limit aligned to sales activity. As the business grows and invoices more, more finance becomes available. Unlike traditional bank loans, which have a fixed limit, the funding available through receivables finance can increase in line with business performance.

By utilising factoring, businesses can also alleviate the administrative burden of chasing customer payments, freeing up time to focus on other core business activities.

Considerations and risks

Like any financial solution, receivables finance also carries potential downsides. Businesses need to understand that factoring companies charge fees and interest for their service, which can be higher than traditional forms of financing.

In addition, if the business opts for factoring, customer relationships might be impacted, since the factor takes over the collection process. This change can sometimes cause friction, especially if customers are not accustomed to dealing with third parties for payment matters.

While invoice discounting keeps the collection process with the business, it requires robust credit control procedures. Failure in maintaining effective collections can lead to increased costs and potential financial difficulties.

Lastly, businesses must remember that while receivables finance provides quicker access to cash, it does not generate new capital but rather advances funds that are already owed to the business. It should therefore be part of a comprehensive financial strategy, not a standalone solution for cash flow management or growth funding.

Conclusion

Receivables finance can be a powerful tool for businesses seeking to manage cash flow more effectively, reduce financial risk, and free up time and resources for growth-oriented activities. However, it is essential to weigh the costs and benefits carefully, possibly with the help of a financial advisor, and consider it as part of a broader financial management strategy.

As we move into an increasingly unpredictable business landscape, tools like receivables finance can provide a lifeline for businesses to navigate short-term hurdles while pursuing long-term growth.

Looking forward, the rise of fintech platforms has broadened the scope of receivables financing, making it more accessible and flexible than ever before. Advanced technologies are driving improvements in risk assessment, speed of service delivery, and user experience. This digital revolution in receivables finance can offer customised solutions that cater to the specific needs of businesses, enhancing the appeal of this form of financing.

In light of potential economic uncertainties and market fluctuations, being able to quickly convert sales into cash could be the critical difference between stagnation and growth. Thus, understanding and leveraging the power of receivables finance could provide a significant competitive advantage in today’s fast-paced business environment.

It is important to emphasise that receivables finance should not be seen as a ‘quick fix’ or a substitute for a sound business model and strong financial management. It’s an addition to the suite of financial tools available to a business, to be used wisely and strategically.

As with any financial decision, choosing to use receivables finance should be based on careful consideration of a range of factors, including the nature of your business, your financial position, the quality of your debtor book, your future growth projections and the prevailing economic conditions.

For businesses that understand its mechanics and can effectively integrate it into their financial strategy, receivables finance is a powerful instrument that can help to unlock potential and drive growth in the increasingly competitive UK business landscape.

Receivables finance FAQ

What types of businesses can benefit from receivables finance?

Businesses in various sectors can benefit from receivables finance, especially those with a significant portion of their capital tied up in unpaid invoices. It’s particularly useful for businesses with long payment terms or those experiencing rapid growth, such as manufacturing, wholesale, recruitment agencies, and service providers.

How quickly can businesses receive funds through receivables finance?

The speed of funding can vary, but in many cases, businesses can receive an initial advance within 24-48 hours of submitting an invoice. The remaining balance is typically received once the customer pays the invoice in full.

Are there any minimum turnover requirements for businesses considering receivables finance?

The requirements can vary between finance providers, but typically, businesses with a turnover of £250,000 or more are suitable candidates for receivables finance. However, there are facilities designed for smaller businesses as well, so it’s worth exploring different providers.

What is the cost of receivables finance?

Costs can vary widely based on the provider, the volume of invoices, and the creditworthiness of your customers. Fees usually involve a service charge (a percentage of each invoice’s face value) and an interest charge on the cash advanced. Always ensure you understand all fees and charges before entering an agreement.

Can receivables finance help businesses manage credit risk?

Yes, in some cases. Some receivables finance providers offer non-recourse factoring, which provides protection against customer insolvency. This means if a customer can’t pay the invoice due to insolvency, the factor absorbs the loss.

Is it necessary to finance all invoices, or can a business choose specific invoices?

Some finance providers offer selective invoice finance, where businesses can choose which invoices to finance. This can be useful for businesses that only need occasional help with cash flow or those with specific customers who consistently pay late.

Will customers know if a business is using receivables finance?

It depends on the type of financing. In factoring, the finance company takes over the collection process, so customers will know about the arrangement. In invoice discounting, the business retains control of collections, and the financing arrangement can remain confidential.

Compare ⓘ

Reviewed by , Managing Director

Important

Business Financed provides general information, but not financial advice. Always speak to a qualified expert to get personalised advice for your business.

Advertising disclosure

We may be paid a commission by our FCA-regulated partners when you click on the links in our articles. This does not affect our independent journalism.

Learn more

You can learn more about how this website operates by clicking here.