Invoice finance for SaaS companies: when it works and when it doesn't
Invoice finance only works for a SaaS company that sends invoices to business customers and waits to be paid. If customers pay by card or direct debit at the start of each month, there is no unpaid invoice to lend against. Annual licences billed in advance are harder to fund, because the customer is paying for a service you haven't delivered yet. If most of your income is monthly subscriptions, recurring revenue finance, which lends against your subscription income, usually fits better.
Which of your income can be funded
| How you bill | Invoice finance? | What to know |
|---|---|---|
| Monthly, paid by card or direct debit up front | No | You are paid straight away, so there is nothing to fund. Look at recurring revenue finance. |
| Monthly invoices to businesses on 30-day terms | Often | Many small invoices mean more admin. Ask whether the lender connects to your accounting software. |
| Annual licence invoiced in advance to a business | Some lenders | Most of the service is still to be delivered. Some lenders won't fund it; some fund it with limits. Ask before you apply. |
| Set-up, implementation or consulting fees invoiced after the work | Yes | The work is done, so these look like any other business invoice |
| Usage billed in arrears to businesses | Usually | The usage has happened, so the customer owes the money |
Check your contracts too. If a customer can cancel and get a refund for the unused months, a lender will see that invoice as weaker.
Invoice finance or recurring revenue finance?
| Point | Invoice finance | Recurring revenue finance |
|---|---|---|
| Lends against | Unpaid invoices to named business customers | Your subscription income, current and expected |
| Repaid | When each customer pays | Over an agreed period, often from monthly income |
| Lender looks at | Whether each customer will pay | Monthly recurring revenue, churn, growth and cash in the bank |
| Suits | Business-to-business software with enterprise invoices on terms | Monthly subscriptions, card or direct debit billing |
Recurring revenue lenders set their own terms and few publish them, so compare written offers on total cost. More detail: invoice finance vs revenue-based finance.
A worked example
You invoice a business customer £60,000 for a year's licence, on 60-day terms, and a lender agrees to fund it. These are example figures, not a quote. The discount charge is 6.75% a year: the Bank of England base rate (4%) plus 2.75%, the margin UK broker ABC Finance uses in its own cost example.
| Paid to you when you invoice (85%) | £51,000 |
| Discount charge: 6.75% a year on £51,000 for 60 days | £566 |
| Service charge: 1% of the invoice | £600 |
| Paid to you when the customer pays (£9,000 less charges) | £7,834 |
| Cost of getting £51,000 sixty days early | £1,166 |
If you have only a few large enterprise invoices a year, selective invoice finance lets you fund just those. Try your own figures in the calculator.
Lenders' published terms
These are general invoice finance lenders, not SaaS specialists. Ask each one how it treats licences billed in advance.
| Lender | Published minimum turnover | Paid up front | Source |
|---|---|---|---|
| Hydr | None published (single invoices) | Up to 100% per invoice | hydr.co.uk |
| Ultimate Finance | £600k | Up to 95% | ultimatefinance.co.uk |
| Time Finance | None published | Up to 90% | timefinance.com |
| Close Brothers Invoice Finance | £750k | Up to 90% | closeinvoice.co.uk |
Figures as published on each lender's own website (each check is dated in our Rate Index). Most of these lenders do not publish their fees.
Comparing lenders for a software business: SaaS receivables finance.
Questions
Will customers know I use invoice finance?
With factoring, yes, because they pay the lender. With confidential invoice discounting they usually won't. Not every lender offers confidential discounting to smaller businesses, so ask before you apply.
Does the lender's charge affect raising investment?
It can. Most invoice finance lenders register a charge over your company at Companies House, and investors will see it when they check your company. A new investor or lender may want it released, or an agreement about who ranks first. Raise it with your lender and your solicitor early, not on the day you close the round.
What if a customer disputes an invoice that was funded?
The lender will usually take that invoice out of what you can draw against, and you may have to pay back the money it advanced on it. Sort disputes out quickly and keep clear records of any credit notes.
Does a lender care about my churn?
An invoice finance lender mainly cares whether each invoiced customer will pay that invoice. A recurring revenue lender looks closely at churn, because its loan is repaid from future subscriptions.
Can I use both?
Possibly, but both lenders may want security over the same things. If you already have a lender with a charge over your company's assets, the new lender will need it released or an agreement about who ranks first. Charges are listed at Companies House.
We sell to the public sector. Does that help?
Lenders usually see public bodies as low risk. But public sector buying often comes with purchase orders and approval steps. Make sure each invoice matches its purchase order, or payment can be held up.
How invoice finance works in general: how invoice finance works. Factoring and discounting compared: factoring vs invoice discounting.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam was managing director of Penny, a UK invoice finance business, from July 2020 to November 2023. His career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library. Career record.
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