Is invoice finance suitable for start up businesses?

Yes, depending on your business’s financial situation and needs, invoice finance can be a suitable option for start ups looking to manage cash flow and activate growth.

With the average time from Seed to Series A funding taking eighteen months, it’s no surprise start ups often look for funding solutions to help them drive growth, make payroll, and purchase stock.  

Invoice finance is a popular option and there’s been steady growth in this funding solution, including a 38% increase in companies using invoice financing to support their export activities. In fact, in 2023, 32% of financial brokers surveyed predicted invoice financing would take the lead in cash flow support services among B2B borrowers for the following year.

What is invoice finance?

Ever had a client delay paying an invoice? You know they will send the funds…eventually. But that assurance won’t pay your suppliers and bills or ease your mental load.

You’re not alone in this experience. According to one report, 27% of SMEs in the UK in 2023 were owed £5000 to £20,000 in outstanding invoices, with 55% reporting an increase in late payments across the year.

Invoice finance is a type of secured business loan that can take away some of the pressure of waiting for clients to pay, freeing you up to focus on growth and deliverables. With invoice finance, the lender sends you part of the funds due from the invoice, and the invoice is in turn used as security for the loan. You can usually release up to 90% of the invoice amount.   

Using invoice finance to manage cash flow as a start up

Invoice finance isn’t only suitable for relieving some of the financial pressure of delayed invoice payments. With invoice finance, you can release funds from newly sent invoices and lenders often extend funds within 24 hours, helping you manage cash flow more effectively.

This form of funding is also especially helpful for B2B businesses, where 30-day payment terms are the standard, as it bridges the gap between invoicing and payment ensuring you have the working capital to cover expenses, purchase inventory, and invest in growth.

What happens if my client doesn’t pay?

Invoice finance is only as good as the strength of your debtors. If your client does not pay the invoice, you may still be held liable for the loan. Confirm with the lender before signing and always consider your affordability before committing to any financial arrangement.

Will the lender communicate with my client?

If you use invoice factoring, then yes. If you use invoice discounting, then you can seek confidential arrangements. In the first instance, the lender will chase down the client for the funds, in the second, you will still need to do the legwork.

Consider carefully how you feel about customers knowing you’re using invoice finance. If you’d prefer to keep this information private, look into invoice discounting. If you’d like to use invoice finance for some customers but manage others traditionally, consider selective invoice finance.   

Be aware that customers will have to change the account they pay into, and invoice finance can be admin heavy.

Know your invoicing rights

While invoice finance is a helpful and suitable tool for start up businesses looking to release funds early, it’s also important to know your rights as a UK business.

As a business, you have the right to set your own payment terms, which could mean upon receipt or due in a certain number of days, weeks, or months. If you decide not to set a specific payment date, your client or customer is required to make the payment within 30 days of receiving either your invoice or the product or service.

You also have the right to charge interest on unpaid invoices. The amount of interest can be dictated either in the signing contract, or by law if you’re a B2B company and there is no specification in the contract. The annual interest amount specified by the government is 8% plus the Bank of England’s base rate at the time.

While it’s your right to set your payment terms, terms that exceed 90 days can reduce your chances of finding an invoice finance lender willing to extend funds.

Find suitable invoice finance for your start up

We help match start ups with suitable funding solutions, including invoice finance. Just click the link below and fill out the online form to find out how much you’re eligible to borrow.

Find invoice finance for your start up business.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.