When is invoice finance better than a business loan?

27% of UK SMEs are currently owed between £5,000 and £20,000 in outstanding invoices. If you’re in this position, choosing the right funding option to plug the gap could be the difference between smooth cash flow and sleepless nights.

Both invoice finance and business loans can help solve cash flow problems, but they work in very different ways. And picking the wrong one could cost you time, money or even opportunities to grow.

In this article, we’ll explain what each option involves and when they might make most sense for your business.

Key points:

• Invoice finance provides faster access to cash (24-48 hours) and is easier to qualify for, making it ideal for immediate working capital needs

• Business loans offer larger amounts of funding but take longer to secure and require a stronger credit history

• Funding Options by Tide connects you with over 120 lenders to find the right finance solution for your needs

What is invoice finance?

Invoice finance is a product where you can borrow a percentage of the value of outstanding invoices from a lender. Instead of waiting 30, 60 or even 90 days for customers to pay, you can access up to 95% of your invoice value within 24-48 hours. You issue an invoice to your customer as normal, then send a copy to your invoice finance provider who advances you most of the money immediately.

There are two main types of invoice finance:

• Invoice factoring: The finance company chases payments and customers know about the arrangement

• Invoice discounting: You keep control of collections confidentially

The big advantage of invoice finance is speed and accessibility – you can qualify with annual turnover as low as £30,000, and approval is based more on your customers’ creditworthiness than your own credit score.

Invoice finance can work well for B2B businesses with customers who pay their bills reliably. Repayments are made automatically as your customers settle their invoices, and there aren’t fixed monthly payments to worry about.

What is a business loan?

Business loans give you a lump sum of money that you pay back over time with interest. Unlike invoice finance, which is tied to specific invoices, you can use a business loan for almost any business reason (e.g. to buy equipment or fund expansion). Loans can be secured with collateral or unsecured, but you’ll be charged higher interest rates if you opt for the latter.

Repayments are typically fixed amounts each monthly for an agreed period (e.g. 12 months). This can be a helpful way of managing your money, but it also means you’re committed regardless of how your business performs during that period. Qualification requirements are generally more stringent than invoice finance, as lenders usually want to see a strong credit history, solid financials and may require security.

Business loans can provide larger amounts than invoice finance and may offer a competitive interest rate if your business has a good credit history. But the application process can take weeks or months, compared to invoice finance’s 24-48 hour turnaround.

When invoice finance could be better for your business

If you need cash urgently or don’t meet traditional lending criteria, invoice finance could be your answer. It’s designed for businesses that have money tied up in unpaid invoices and can’t afford to wait weeks or months for traditional loan approval.

Invoice finance can be particularly useful if you’re a newer business or have limited credit history. You can often qualify for invoice finance even if a lender turns you down because approval depends on your customers’ creditworthiness rather than yours. And if you’re tired of chasing late-paying customers, invoice factoring takes that burden off your shoulders completely.

Invoice finance might be right for you if:

• You need cash within 24-48 hours rather than weeks

• Your customers take 30-90 days to pay invoices

• You’re a startup or have limited credit history

• You want flexible funding that scales with your sales

• You invoice other businesses regularly

• You prefer not to take on traditional debt

• You want someone else to chase late payments

• Your cash flow is seasonal or unpredictable

When a business loan could be better for your business

If you need a larger amount of cash or have a strong credit history and want repayments to be predictable, a business loan might make more sense. Business loans come into their own when used to make big one-off purchases or investments that generate returns over time.

A loan can also be more suitable for your business if you don’t invoice regularly or want to keep your customer relationships confidential. And if you’re an established business with good credit, you might secure better interest rates than invoice finance fees.

A business loan might be right for you if:

• You need larger cash amounts (e.g. £10,000+)

• You’re buying property, equipment or expanding premises

• You want your monthly payments to be predictable for easier budgeting

• You have a strong credit history and can offer security

• You don’t invoice regularly or are a B2C business

• You prefer to keep customer relationships private

• You can wait weeks or months for approval

• You prefer a more traditional lending relationship

Choosing between invoice finance and a business loan

Figures are based on typical terms and may not reflect actual offers.

The right choice will depend on your specific situation, but there are several factors that can guide your decision.

Start by considering timing. If you need money within days rather than weeks, invoice finance is almost certainly the most suitable option. But if you can wait and want to explore all your options, business loans might offer better long-term value.

Think about what you need the money for too. Invoice finance can help with working capital issues, allowing you to pay suppliers, cover payroll or cover periods between completing work and getting paid. Business loans are more suitable for investments in assets, expansion or big one-off expenses.

The age of your business and whether you have a strong credit record also matter greatly. Newer businesses or those with patchy credit records will likely find invoice finance more attainable. But established businesses with strong financials could get more competitive deals from traditional lenders.

The amount of money you need is another important factor. If you need more money than your outstanding invoices can provide, a business loan might be your only option. But if you’re just trying to smooth out your cash flow, invoice finance could be a suitable choice.

Don’t forget to consider your customers either. If maintaining complete privacy about your finances is important, invoice discounting can keep things confidential. But if you don’t mind customers knowing you use finance, or if chasing payments is a burden you’d rather avoid, invoice factoring could actually improve your operations.

Find business finance with Funding Options by Tide

Whether you’re looking for a standard business loan, a short-term business loan, or something a little more specialist, like auction finance for property developers, we’re one of the leading names in business finance in the UK, having helped facilitate over £800 million in finance to more than 18,000 customers. 

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

Can startups access invoice finance?

Yes, startups can often access invoice finance more easily than traditional loans. You’ll typically need at least £30,000 annual turnover and be invoicing creditworthy B2B customers, but many providers are happy to work with businesses that have been trading for just a few months.

Will customers know about invoice finance arrangements?

It depends on the type. With invoice factoring, customers deal directly with the finance provider for payments, so they’ll know about the arrangement. With invoice discounting, you maintain control of collections so customers typically won’t know you’re using finance.

What if customers don’t pay their invoices?

This varies by provider and product type. Some invoice finance agreements include bad debt protection, where the provider takes the risk if customers don’t pay. Others require you to repay the advance if customers default. This is why it’s important to check the terms before signing.

How quickly can I access funds with each option?

Invoice finance can provide funds within 24-48 hours once your request is approved and set up. Business loans typically take 2-8 weeks from application to receiving funds, depending on the lender and complexity of your application.

Can I use both options together?

Yes, lots of businesses use invoice finance for working capital needs alongside business loans for longer-term investments. They serve different purposes and aren’t mutually exclusive, but you should let all lenders know about your existing arrangements.

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.