Can I use individual customer debt to gain access to invoice finance?

With 2 million small to medium UK businesses currently owed between £5000 and £20,000 in unpaid overdue invoices, it’s no surprise many businesses look towards invoice finance to help regulate cash flow. But can an individual customer’s debt be converted into cash? Find out here.

Can I use individual customer debt to gain access to invoice finance?

It is possible to leverage customer debt as security for a loan, but it’s a little harder and riskier than standard invoice finance. Leveraging a single invoice, or several invoices, as security is called selective invoice finance.

It differs from standard invoice finance in that rather than selling off your entire ledger to a lender, you choose one, or several clients and invoices to use as security. This provides you with greater flexibility but it can also result in higher fees per invoice or per client and the lender will check the end client’s creditworthiness, as opposed to just yours.

Example: Company Y is a startup that sells services. It needs to pay its employees at the end of each month, but provides its clients with the standard 30 day payment terms, meaning it’s always lagging a month behind in payments. Company Y’s clients pay on time, but the 30 day terms make cash flow management very difficult. They might like to look at standard invoice finance.

Example: Company Z is a small B2B business. They’ve been around for several years now and their cash flow is reasonably steady. They have one specific client, Client A, that owes them a substantial amount. Client A is a stable company with a strong credit track record and they pay their invoices, but only at the end of the 60 day payment terms the two companies have agreed to. If Company Z wanted to unlock the cash from these large, stable invoices, they could look at selective invoice finance as a way to do so.

It’s worth noting that invoice finance is only as good as the strength of your debtors, your customers will have to change the account they pay into, and it can be admin heavy.

What if the invoice payment date has already passed?

With standard invoice finance, you get access to funding that may be coming in within the next 30, 60, or 90 days, depending on the payment terms on your invoices. But if you’re trying to gain access to funding for an invoice where the payment date has already passed, you may struggle to demonstrate to the lender that this is a creditworthy client. This is because if the client isn’t paying now, there’s a chance they won’t at all. While there’s always a chance customers may renege on their contracts, the possibility is made greater if a client is already ignoring payment dates.

For that reason, you may find lenders look less favourably on these invoices when it comes to using them for invoice finance. However, it is still possible to find selective invoice finance for invoices where the payment date has passed. Just look out for the lender’s terms to find out if they accommodate this. Be aware that lenders may charge higher fees and interest rates for older unpaid invoices.

If you decide you’d like to go ahead despite the higher perceived risk, fill in the form here, outline all relevant details, and we’ll get back to you to let you know if your business is eligible for selective invoice finance.

Apply for invoice finance with Funding Options by Tide

Trust your clients to pay but need to turn those invoices into cash now? We connect borrowers to our network of 120+ lenders offering between £1000 and £20M. Just fill in the form linked below to find out if you’re eligible.

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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.