What is the difference between invoice financing and receivable financing?

UK businesses are chasing a staggering £23.4 billion in unpaid invoices. Invoice financing could offer a lifeline for those in need of immediate funding.

Receivable financing, which can include invoice discounting and factoring, often gets confused with invoice financing. So understanding the difference between these terms is crucial for you to choose the right option for your business.

With over half of UK businesses experiencing late payments each quarter, both solutions address an issue reportedly costing businesses £22,000 each year.

In 2023, invoice financing (alongside asset based lending) members of UK Finance saw a combined turnover of £316 billion. But what is invoice finance and how does it differ from receivable financing? 

In this article, we’ll explain what each term means, how they work in practice, and which option might be right for your business.

Key points:

• Both invoice financing and receivable financing involve selling your unpaid invoices or borrowing against them to unlock working capital

• Service fees typically range from 0.4% to 2.4% of annual turnover, with research showing up to 165% cost difference between providers

• Funding Options by Tide can help when optimisation of working capital isn’t enough, offering access to business finance up to £20 million

What’s the difference between invoice financing and receivable financing? 

The answer to this depends on who you ask. To many, invoice financing is an umbrella term that encompasses a few different types of invoice based funding solutions – specifically, invoice discounting and invoice factoring. Receivable financing is often used interchangeably with the term invoice financing and can mean the same general umbrella term. 

But the definitions aren't always consistent. Sometimes, receivable financing refers specifically to invoice discounting, which is only one type of these solutions. This can also be called accounts receivable financing. Some people also consider invoice financing to refer specifically to invoice factoring only, with receivable financing referring to invoice discounting and the removal of the umbrella term altogether.

Ultimately, both terms mean selling your accounts receivables (unpaid invoices you have sent out to clients) or borrowing against them by using them as collateral for a short term business loan.  

What does accounts receivable stand for?  

Accounts receivable (AR) is the money you are owed but have not yet been paid. This is in comparison to accounts payable, which is the money you owe your suppliers but have not yet paid. 

AR is considered an asset as it is future income and will one day be traded for cash. Tracking your accounts receivable is important for maintaining stable cash flow, as it signifies the future income flowing into the business and therefore the funds you will have available to pay recurring bills and current employees.

The average UK business now waits 47 days for payment, with some sectors facing even longer delays. For example, construction companies experience the longest delays at 105 days on average.

Invoice discounting vs invoice factoring 

As mentioned, within that umbrella term sit the two distinct invoice finance types – discounting and factoring. Invoice discounting involves borrowing against your sales ledger, this is similar to using invoices clients have not yet paid for as security for a short term loan.

Essentially, you send the invoice, the lender extends a percentage of the funds to you (not usually surpassing 90% of the value of the invoice), and when your client repays the invoice, the lender gets what they put forward plus fees and you get the rest. Your customers usually won’t know about the arrangement, and you maintain control of the collection process.

Comparatively, invoice factoring involves selling invoices outright. Sometimes, you sell your entire ledger, whereas on other occasions, you may sell only one invoice or all the invoices from a specific client, this latter option is called spot factoring or selective invoice finance.

Invoice factoring isn’t confidential – clients will often need to change the account they pay into. The factoring company typically takes on many of the administrative activities involved in payment collection, which can save you time but means losing direct control over customer relationships.

What are the costs involved?

Service fees typically range from 0.4% to 2.4% of annual turnover, depending on your business size and risk profile. With up to 165% cost difference between the highest and lowest-priced providers, it’s important to compare several options to find the most suitable and competitive option for your business.

• Smaller businesses with £100,000-£250,000 turnover can face service charges of 1.85-2.4% of their annual turnover, with 80-90% advance rates.

• Medium businesses at £1 million turnover typically receive better terms at 0.6-0.75% service charges with 85-95% advance rates.

• Large businesses with £3 million-plus turnover usually achieve the most competitive rates at 0.4% service charges with 90-95% advance rates.

Fintech lenders can often provide 1-24 hour decisions and funding within 24-48, while traditional banks can require 3-14 days for approval and 2-8 weeks to process the loan.

Despite the costs involved, receiving the money faster than waiting for each invoice to be paid can often justify paying the service fees. But you’ll want to analyse the pros and cons based on your outstanding invoices and cash flow needs.

How different industries use these solutions

Construction companies face the longest payment delays, with 28% of sector insolvencies caused by late payments in 2023. The sector’s unique characteristics – upfront costs for materials and labour, milestone-based payments, and 30-120 day payment cycles – can make invoice financing an important part of their survival toolkit.

Recruitment agencies represent another high-usage sector, facing weekly payroll obligations against monthly client payments. The industry uses some of the largest facilities (£25,000-£150 million) with advance rates up to 100% of invoice value.

Manufacturing businesses are also large users of invoice and receivable financing, particularly among SMEs facing long production cycles and working capital requirements for growth orders. Professional services – including legal, consulting, and IT firms – use invoice financing to manage project-based income irregularities and extended payment terms of 30-60 days.

Why would someone use invoice finance or receivable finance? 

AR finance is a helpful way to help bridge the gap between providing a service to a client and receiving payment, which for many businesses, can occur months later. Here are some of the reasons some people might use receivable finance. 

Get paid faster 

Many B2B businesses are expected to provide 30, 60, and 90 day payment terms when invoicing clients. This can put a strain on cash flow as money is flowing out in line with providing services in a given month, but the money is then flowing back in at a slower pace. Invoice finance can help smooth out these gaps. 

Built in collateral 

Businesses with poor credit can sometimes find it easier to get approved for invoice finance than, say, for a large unsecured business loan. That’s because the security is built into the loan in the form of the invoice itself. Some factoring companies even use the end-client’s creditworthiness to decide whether to extend funding or not. 

Outsourced admin 

Invoice factoring businesses sometimes take over some of the administrative activities involved in collecting and managing incoming payments. This can help reduce some administrative labour,  but it means losing direct control over customer relationships.

Possible reduction in stress 

Within invoice finance sits something called non-recourse factoring. Non-recourse factoring involves selling an invoice and even if the end-client doesn’t pay, your part is played out and the factoring company won’t come back to you for the funds. This reduces anxiety about waiting for clients to pay their bills, though it typically costs more.

Which option’s right for your business?

The choice between invoice financing and receivable financing depends on several factors.

• Business size: Smaller businesses often find factoring more accessible due to included credit management services, while larger businesses may prefer receivable financing for greater control and potentially lower costs.

• Customer relationships: If maintaining direct customer relationships is important, receivable financing offers more discretion. But if you’re comfortable with customers knowing about your financing, factoring provides additional support services like credit control and debt collection.

• Administrative capacity: Businesses with limited credit control resources benefit from factoring’s comprehensive service. Companies with strong internal processes may prefer the flexibility of receivable financing.

• Growth stage: Rapidly growing businesses often prefer factoring for its scalability and administrative support. Established businesses with stable customer bases may find receivable financing more cost-effective.

Invoice financing and receivable financing alternatives

While invoice and receivable financing suit many businesses, other options may be more appropriate depending on your circumstances:

• Short-term business loans offer fixed amounts with predictable repayment schedules, ideal for specific purchases or expansion plans.

• Working capital finance provides flexible access to funds for operational needs without using invoices as security.

• Asset finance enables equipment purchases through hire purchase or leasing arrangements.

• Emergency business finance provides rapid funding for urgent situations when you can’t wait for invoice payments.

Are there risks to invoice financing and receivable financing?

Like any financial product, invoice and receivable financing carry risks you should consider carefully:

• Customer relationship risks include the potential impact on client perceptions, especially with factoring where clients know about your financing arrangement. You’ll also lose direct control over customer payment relationships and communications.

• Financial risks involve recourse arrangements where you remain liable if customers don’t pay, which could potentially lead to double losses. You’ll depend on customer creditworthiness rather than just your own business strength, and fees can add up quickly if customers pay later than expected.

• Operational risks include potential disruption to your existing customer payment processes, extra administrative burden of managing the financing relationship, and reduced flexibility in payment terms negotiations with customers.

• Credit impact considerations include some arrangements appearing on your credit file, potentially affecting future financing applications. Bad debt from factoring arrangements could also impact your business credit score.

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Checking if you’re eligible is free, only takes a few minutes, and while a full application would impact your personal or business credit score, checking eligibility won’t. Just submit your details via the link below to find out if you could be eligible to borrow up to £20 million.

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FAQs

Are invoice financing and receivable financing the same thing?

The terms are often used interchangeably, and different providers define the terms slightly differently. But both involve using unpaid invoices to access working capital, either by selling them (factoring) or borrowing against them (discounting).

How quickly can I access funds?

Most providers offer funding within 24-48 hours of approval, compared to traditional bank loans which can take 2-8 weeks. Some fintech lenders provide decisions within hours and same-day funding for very urgent needs.

What percentage of my invoice value can I access?

Advance rates typically range from 80-95% of the invoice value, depending on your business size, industry, and customer creditworthiness. Larger businesses and those with creditworthy customers generally receive higher advance rates.

Will my customers know I’m using invoice financing?

With invoice factoring, yes, since customers will typically need to pay the factoring company directly. With invoice discounting (receivable financing), arrangements are usually confidential, and customers continue paying you as normal.

What happens if my customer doesn’t pay?

This depends on whether you have recourse or non-recourse financing. With recourse arrangements, you remain liable for unpaid invoices. Non-recourse factoring protects you from customer defaults, but this typically costs more and has stricter approval criteria.

Can I choose which invoices to finance?

Yes, through selective invoice finance or spot factoring. This allows you to finance specific invoices rather than your entire sales ledger, providing more flexibility but often at higher rates per transaction.

What industries work best with invoice financing?

Any business that invoices other businesses (i.e. B2B) can potentially use these services. Common users include construction, recruitment, manufacturing, professional services, and IT companies.

How much does invoice financing cost?

Service fees typically range from 0.4% to 2.4% of annual turnover, plus interest charges. There’s up to a 165% difference between the highest and lowest-priced providers, so compare your options first.

Do I need to finance all my invoices?

Not usually. While some providers prefer whole-ledger arrangements, many offer selective options where you can choose specific invoices or customers. This provides flexibility but may come with higher per-transaction costs.

Will this affect my credit score?

Invoice financing arrangements can appear on your credit file, depending on the structure. But because approval is primarily based on your customers’ creditworthiness rather than your own, it’s often accessible to businesses with limited credit history.

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.