Invoice finance or a business loan? How to fund customers who pay slowly
Invoice finance or a business loan? If big customers pay in 60 or 90 days, here is how to choose, what lenders check, and what a 60-day cap may change.
Reading time5 min read
CategoryBusiness guides
Written byThe bizbritain team
Invoice finance or a business loan? If big customers keep you waiting 60 or 90 days, invoice finance usually fits better when the gap grows with your sales. A business loan usually fits better when the gap is a one-off. The test is whether the problem comes back every month.
You have done the work and sent the invoice. Until the customer pays, you are in effect lending them the money. This guide covers how to choose, what a lender will look at, and what new payment rules may change.
Section 01
Is invoice finance a good idea when big customers pay slowly?
It often is, if three things are true. You invoice other businesses on credit terms. Your customers are reliable payers, just slow ones. And your sales are growing, so the money tied up in unpaid invoices keeps rising.
Invoice finance lets you borrow against those unpaid invoices. A provider advances most of each invoice's value soon after you raise it. When your customer pays, you receive the rest, minus the provider's charges.
The facility grows with your sales. Win a bigger order and there are more invoices to borrow against. That is the main reason it can suit a growing business better than a fixed loan.
There are two main types. With factoring, the provider collects payment from your customers. With invoice discounting, you keep collecting payment yourself, and it is usually confidential. Our help page explains the difference between factoring and invoice discounting in more detail.
Section 02
How is invoice finance different from a business loan?
A business loan gives you a fixed sum up front. You repay it in set monthly amounts over an agreed term. It does not depend on who your customers are or when they pay.
That makes a loan the better fit for a one-off gap. Think of a single large order that needs materials bought up front, or a quiet quarter before a new contract starts. Once the gap closes, the loan simply runs down.
An overdraft suits short swings that clear within a few weeks. It is quick to use, but the bank can reduce or withdraw it.
Does the gap come back every month?
If customers always pay late and sales are rising, the gap is permanent. Invoice finance grows with it. If the gap comes from one order or one season, a loan is usually simpler.
Who are your customers?
Invoice finance leans on your customers' ability to pay. A ledger of large, reliable business customers helps. Selling to consumers, or relying on one customer for most of your sales, can make it harder.
What does it cost over a year?
Invoice finance usually carries a charge on the money advanced plus a service fee. A loan carries interest on the full sum for the whole term. Compare the total cost over a year, not the headline rate.
Section 03
Invoice finance or a business loan: what each lender checks
For invoice finance, the provider looks at your customers as much as at you. Expect questions about who owes you money and how reliably they pay.
Your aged debtor list: who owes you what, and how long each invoice has been unpaid.
Your largest customer: how much of your sales depends on one business.
Disputes and credit notes: how often your invoices are queried or reduced.
Your paperwork: clear invoices, purchase orders and proof the work was delivered.
For a loan, the lender looks more at your business as a whole. That means your accounts, how much you can afford to repay and how long you have been trading. For the growth loans we arrange, lenders want at least 12 months of trading, and two years is preferred for unsecured options.
Many businesses end up using both: a facility for the sales ledger and a loan for a one-off cost. We can set the two side by side as part of your growth finance, and help you choose the structure that fits.
Section 04
The 60-day payment cap: what may change
The Commercial Payments Bill is going through Parliament now. As introduced, it would cap payment terms between businesses at 60 days, with strictly limited exemptions.
It would also make interest on late payments mandatory, at 8% above the Bank of England base rate. The Small Business Commissioner would gain powers to investigate persistent late payers and fine them.
So, will it fix slow payment? It may help, but not straight away. The government has promised a lead-in time and a transition period before the rules apply, and they will not apply retrospectively.
And 60 days is still two months of waiting. A business with growing sales will still have money tied up in invoices. Plan your funding around how your customers pay today, not how they may pay once the new rules arrive.
This guide is general information, not financial advice. Applications are subject to status, affordability and lender criteria.
Got a question the guide didn’t answer? Talk to an advisor.
We’ve arranged growth finance for thousands of British businesses. If you’ve read the guide and you want to see what £25k to £10m from 100+ lenders could do for yours, our advisors are on the phone now.