Invoice Finance Explained

What Is Invoice Finance?

Invoice finance is a funding solution that allows businesses to unlock cash tied up in unpaid invoices. Rather than waiting 30, 60, or 90 days for customers to pay, you can access up to 90% of an invoice's value within 24 hours by selling it to a finance provider.

This form of debtor finance is particularly valuable for UK businesses experiencing growth, managing seasonal fluctuations, or simply seeking to improve working capital without taking on traditional debt.

Unlike a business loan, invoice finance isn't borrowing—you're receiving an advance on money already owed to you. Once your customer pays the invoice, the finance provider releases the remaining balance, minus their fees.

How Invoice Finance Works

The invoice finance process follows a straightforward cycle:

1. **You raise an invoice** to your customer with standard payment terms (typically 30-90 days)
2. **You submit the invoice** to your invoice finance provider
3. **The provider advances funds**—usually 70-90% of the invoice value—within 24-48 hours
4. **Your customer pays** the invoice directly to the finance provider (or to you, depending on the arrangement)
5. **You receive the balance**—the remaining 10-30%, minus the provider's fees

This creates a continuous funding cycle: as you issue more invoices, you unlock more working capital, enabling you to take on larger orders, pay suppliers promptly, and invest in growth opportunities.

Invoice Factoring vs Invoice Discounting

Invoice finance encompasses two distinct products, each suited to different business needs:

Invoice Factoring

With **invoice factoring**, the finance provider takes over your credit control function. They manage the sales ledger, chase payments, and collect money directly from your customers.

**Key characteristics:**
- Your customers know you're using invoice finance
- The provider handles all credit control and collections
- Typically costs slightly more due to the additional service
- Suitable for businesses without dedicated credit control teams
- Minimum turnover requirements usually start from £50,000 annually

Invoice Discounting

With **invoice discounting**, you retain complete control over customer relationships and collections. The arrangement remains confidential—your customers don't know you're using invoice finance.

**Key characteristics:**
- You manage your own sales ledger and credit control
- Customers pay you directly, and you forward payments to the provider
- Generally lower fees than factoring
- Requires established credit control processes
- Typically requires minimum annual turnover of £250,000-£500,000
- Often called "confidential invoice discounting"

The choice between factoring and discounting depends on your business size, internal resources, and whether you're comfortable with customers knowing about the arrangement.

Who Can Benefit from Invoice Finance?

Invoice finance suits businesses across virtually every sector, but it's particularly valuable for:

- **Fast-growing companies** that need working capital to fulfil increasing orders without waiting for payment
- **B2B businesses** with extended payment terms (30-90 days) that create cash flow gaps
- **Seasonal businesses** experiencing fluctuating revenue throughout the year
- **Businesses with creditworthy customers** in stable industries
- **Companies struggling with late payments** that impact operational cash flow
- **Startups and SMEs** unable to access traditional bank lending due to limited trading history

Common sectors using invoice finance include recruitment, manufacturing, wholesale, construction, logistics, and professional services.

Costs and Fees Explained

Invoice finance pricing comprises two main elements:

1. Service Fee (Discount Charge)

This is the primary cost, calculated as a percentage of the invoice value and charged for the time between advancing funds and receiving payment from your customer.

- Typically ranges from **0.5% to 5% per month** (or approximately 6-60% annually)
- Depends on your turnover, invoice values, industry, and customer creditworthiness
- Charged only for the period the advance is outstanding
- Lower for larger businesses with higher turnover and creditworthy customers

**Example:** If you receive an £10,000 advance at 2% monthly and your customer pays after 30 days, the fee would be £200.

2. Administration Fee

A fixed monthly or annual charge covering the administrative costs of managing your facility:

- Usually ranges from **£100 to £500+ per month**
- Some providers charge a percentage of monthly turnover instead (typically 0.5-1%)
- May be waived for larger facilities

Additional Potential Costs

- **Set-up fees**: One-off charges ranging from £0 to £5,000
- **Credit protection insurance**: Optional insurance against customer non-payment
- **Early termination fees**: Charges if you exit the agreement before the minimum term

Always request a detailed fee breakdown before committing. The total cost should be weighed against the value of improved cash flow and growth opportunities it enables.

Benefits and Considerations

Benefits

**Immediate cash flow improvement**: Access up to 90% of invoice value within 24 hours, enabling you to pay suppliers, cover wages, and invest in growth without delay.

**Flexible funding**: The facility grows with your business—the more you invoice, the more funding becomes available.

**Accessible to SMEs**: Often easier to obtain than traditional bank loans, particularly for younger businesses or those with limited assets.

**No personal guarantees required**: Many providers offer facilities without directors' personal guarantees, unlike business loans.

**Outsourced credit control**: With factoring, you gain professional debt collection services, freeing up internal resources.

**Supports growth**: Enables you to accept larger orders and take on new customers without cash flow constraints.

Considerations

**Cost**: Invoice finance can be more expensive than traditional overdrafts or loans, particularly for lower-turnover businesses.

**Customer perception**: With factoring, customers will know you're using invoice finance, which some businesses prefer to avoid.

**Selective arrangements**: Some providers only finance invoices to approved customers, potentially excluding your riskier clients.

**Long-term commitment**: Many agreements require 12-24 month minimum terms with penalties for early exit.

**Recourse vs non-recourse**: Most facilities are "recourse," meaning you're liable if customers don't pay. Non-recourse (where the provider assumes the credit risk) costs significantly more.

Eligibility Requirements

While criteria vary between providers, typical requirements include:

- **B2B trading**: You must invoice business customers, not consumers
- **Minimum turnover**: Usually £50,000-£100,000 annually for factoring; £250,000+ for discounting
- **UK-based**: Both your business and customers should be UK-registered
- **Creditworthy customers**: Your customers must have good payment histories
- **Clear invoices**: Invoices must be for completed work or delivered goods, not milestone payments or stage payments (though some specialist providers accept these)
- **No existing charges**: Invoices shouldn't already be assigned to another lender
- **Trading history**: Most providers require 6-12 months of trading, though some work with startups

Sole traders, limited companies, and partnerships can all access invoice finance, provided they meet the provider's criteria.

Choosing an Invoice Finance Provider

Selecting the right provider requires careful comparison:

Key Factors to Evaluate

**1. Advance rates and fees**: Compare the percentage advanced (70-90%) and the total cost including service fees, administration charges, and any hidden costs.

**2. Minimum terms and flexibility**: Understand the minimum contract length, notice periods, and exit fees. Some providers offer "spot factoring" for individual invoices without long-term commitment.

**3. Industry expertise**: Choose providers experienced in your sector who understand its specific challenges and payment cycles.

**4. Technology and reporting**: Look for modern online platforms offering real-time visibility of your facility, advanced funds, and outstanding invoices.

**5. Credit control approach**: If choosing factoring, assess how the provider will interact with your customers—professional, respectful collections are essential for maintaining relationships.

**6. Recourse vs non-recourse**: Decide whether you want to retain bad debt risk (recourse—cheaper) or transfer it to the provider (non-recourse—more expensive).

**7. Selective vs whole turnover**: Some facilities require you to assign all invoices (whole turnover), whilst others let you choose specific invoices (selective).

Types of Providers

- **High street banks**: Offer competitive rates for established businesses but can be slower and more bureaucratic
- **Independent finance companies**: Often more flexible and faster, with expertise across various sectors
- **Specialist providers**: Focus on specific industries (construction, recruitment, etc.) with tailored solutions
- **Fintech platforms**: Modern digital-first providers offering streamlined applications and transparent pricing

Alternatives to Invoice Finance

Business Overdraft

A traditional overdraft provides flexible access to funds up to an agreed limit. Generally cheaper than invoice finance but requires strong financials and may need security.

Business Loan

Fixed-sum lending with structured repayments. Lower interest rates than invoice finance but less flexible and requires good credit history.

Trade Credit Insurance

Protects against customer non-payment but doesn't provide immediate cash—you still wait for payment terms to elapse.

Supply Chain Finance

Your large customers pay your invoices early through their own financing arrangements. Only available if your customers participate.

Merchant Cash Advance

Based on future card sales rather than invoices. Expensive but very accessible for retailers and hospitality businesses.

Revenue-Based Financing

Repayments flex with revenue. Suitable for high-growth businesses but typically more expensive than traditional debt.

The right choice depends on your specific circumstances, growth trajectory, customer base, and how quickly you need access to funds.

Is Invoice Finance Right for Your Business?

Invoice finance excels when you have strong sales but extended payment terms create cash flow pressure. It's particularly effective for businesses experiencing growth, managing seasonal peaks, or unable to access traditional finance.

Before committing:

- Calculate the total cost and compare it to alternatives
- Understand all terms, including minimum periods and exit clauses
- Consider how it will affect customer relationships (particularly with factoring)
- Ensure your invoicing and credit control processes are robust
- Speak to multiple providers to secure competitive rates

For many UK SMEs, invoice finance provides the working capital lifeline needed to transform outstanding invoices into immediate growth opportunities—turning what customers owe you into what you can achieve today.