Most late payment problems start with a fair invoice and a customer who takes 60 or 90 days to settle it. The work is done, wages and suppliers still need paying, and the cash sits in someone else’s bank account. Invoice financing releases most of that money within a day or two of the invoice going out.
It works by lending against invoices you have already raised. The amount available grows with your sales. This page covers the benefits, what it costs, how factoring differs from discounting, who qualifies and where it can go wrong.
Thinking about invoice financing for your business? Speak to a specialist before you apply.
What Invoice Financing Is and How It Works
Invoice financing lets a business borrow against invoices it has raised to other businesses and not yet been paid for. You raise the invoice as normal and send a copy to the finance provider. The provider advances a percentage of its value, usually 80% to 90%, often within 24 hours. When your customer pays, the provider releases the balance, less its fees.
The advance is secured on the invoices themselves, and some providers also ask the directors for a personal guarantee. You do not normally need to put up property or equipment, and that is the main reason smaller firms choose it over a bank loan.
Invoice Factoring and Invoice Discounting
The product comes in two forms, and the difference is who deals with your customers.
| Feature | Invoice factoring | Invoice discounting |
|---|---|---|
| Who collects payment | The provider | You |
| Do customers know | Yes, they pay the provider | Usually not, when it is confidential |
| Credit control | The provider runs the sales ledger | You keep it in house |
| Typical user | Smaller and fast-growing businesses | Mature businesses that have a credit control team |
| Service fee | Higher | Lower |
Factoring suits a business with nobody chasing invoices full time. The provider takes over the ledger and the phone calls, and that can be worth the fee. Discounting suits a business with solid credit control that would rather keep customer contact in house. With confidential discounting your customers pay into an account in your name that the provider controls, and they never see the lender involved.
Either product can be set up across the whole sales ledger. Some providers will also finance chosen invoices only, which is covered further down.
The Benefits of Invoice Financing
The benefits come down to speed, flexibility and what the lender does not ask for.
Cash within days. Instead of waiting 60 or 90 days, you receive most of the invoice value quickly. That working capital covers wages, VAT, suppliers and the cost of starting the next job.
A facility that grows with sales. A fixed loan stays the same size whatever happens to your order book. An invoice facility rises as you invoice more, which suits seasonal firms and those growing quickly. In a quiet month you draw less and pay less.
No property needed. The invoices are the security. A business with plenty of customers and few assets can often raise more this way than a bank would offer against its balance sheet.
Room to take bigger orders. A large contract on 60 day terms can drain a small company before the first payment arrives. Financing the invoices lets you accept the work without stretching your own cash.
Supplier discounts. Some suppliers cut the price for early payment. Spare cash lets you claim that, and the saving can offset part of the finance cost.
Longer terms for customers. Large buyers often insist on 60 or 90 day terms. Invoice financing lets you agree to them without waiting for the money yourself.
Help with credit control. With factoring, the provider chases late payers and runs credit checks on new customers. Detailed payment reports also show which customers are slow, and you can adjust their terms accordingly.
Less reliance on an overdraft. An overdraft can be withdrawn or capped at short notice. A facility tied to your invoices is less likely to disappear while your sales are strong.
What Invoice Financing Costs
There are usually two charges. A service fee covers running the facility and, with factoring, collecting the money. It is a percentage of turnover, commonly from about 0.2% for discounting up to around 3% for a full factoring service. A discount charge works like interest on the money you draw, normally a few percentage points over base rate and paid only for the days the funds are out.
Here is how it looks on one invoice. A £10,000 invoice is financed at an 85% advance, which puts £8,500 in your account on day one. Your customer pays after 45 days. With a discount charge of 7% a year on the money drawn, the interest is £73. A service fee of 1% of the invoice comes to £100. Altogether the cost comes to £173, which is 1.7% of the invoice, and you receive the remaining £1,327 once the customer has paid. These rates are illustrative and your own terms will differ.
Get every charge listed before you sign. Set-up fees, audit fees, minimum annual fees and exit charges can all change the real cost. Many agreements also run for a minimum term, with a notice period of three to twelve months, and a low headline rate can hide a high minimum fee.
Invoice Financing Compared With a Bank Loan
A bank loan usually costs less per pound borrowed, but approval can take weeks and the bank will look at your profit history, security and the directors’ own position. Invoice financing costs more and can be live within days, and the lender relies on the quality of your customers and invoices instead of your own profit record.
For a fast-growing business with a short trading history, speed and flexibility can outweigh the higher price. For one with stable profits and steady funding needs, a term loan may cost less overall. Work out the true cost of both for your own figures before you decide. Our full comparison of invoice financing and business loans covers this in more detail.
Who Can Get Invoice Financing
Most UK businesses that sell to other businesses on credit terms can use it. Providers usually look for the following.
- Sales to companies or public bodies, not to consumers
- Invoices raised after the work or delivery is complete
- A minimum turnover, which differs between providers and starts at around £50,000 with some
- Customers with a good record of paying on time
- Clear invoicing and sound credit control
Sectors with stage payments and retentions, such as construction, tend to need specialist providers. Start-ups can qualify with some lenders, usually on less favourable terms. Providers check the quality of your customers as closely as they check you. A ledger spread across several reliable payers is easier to fund than one dominated by a single buyer.
Risks and Things to Watch
Recourse. Most facilities are with recourse. If a customer does not pay by an agreed date, you repay the advance. Non-recourse and bad debt protection exist, but they cost more and come with limits.
Customer concentration. Lenders cap how much they will advance against any one customer. If a single buyer accounts for most of your sales, you may not be able to finance all of it.
Existing security. If your bank already holds a charge over your book debts, it may block a new facility. Tell the bank early and expect it to release the debts or give consent.
Effect on your accounts. The advance usually shows as borrowing on your balance sheet. That can change the ratios other lenders and loan covenants look at.
Cost against margin. If your profit margin is thin, finance charges can take a large share of it. Check the maths on a typical job first.
Contract terms. Minimum terms, exit notice and the requirement to finance every invoice can be hard to leave once you have started.
Late payment risk is easier to manage when you vet new customers, set payment terms in writing, follow up overdue invoices quickly and consider credit insurance for your largest accounts.
Selective Invoice Finance
Selective finance, sometimes called spot factoring, lets you choose individual invoices to finance. You use it when you need it and pay only for what you use. There is usually no long contract and no minimum turnover commitment.
The cost per invoice is generally higher than on a whole-ledger facility. It works well for seasonal trade, for a single large invoice that would otherwise strain your cash, or as a way to try it out before taking on a full facility.
How Technology Has Changed Invoice Financing
Most providers now connect to accounting packages like Xero, Sage and QuickBooks. Invoices upload automatically, advances can be requested online and repayments are matched to the ledger without re-keying. Some lenders also use open banking data to see cash flow directly, which speeds up approval.
That saves time and cuts errors. The charges and the small print still need the same careful reading.
When Invoice Financing Is Not the Right Choice
It does not suit a business that sells mainly to consumers, because the invoices are not to other businesses. It is a poor fit where margins are very thin, where invoices are frequently disputed or where the need is a one-off gap instead of a repeating one.
If the funding need is for machinery, vans or property, asset finance or a loan usually suits better. Where invoices, stock and equipment all need funding, asset-based lending can cover them in one facility.
How a Broker Helps With Invoice Financing
Providers differ on fees, minimum terms, sector appetite and how much of your sales ledger they will fund. Two quotes for the same business can look very different once the service fee, discount charge and minimum fee are added together. A broker who deals with these providers regularly can compare the full cost, match the product to your customers and sales pattern, and explain the contract terms before you commit. Our SME invoice finance case study shows how this works in practice.
Frequently Asked Questions
What is invoice financing?
A business borrows against invoices its customers have not yet paid. The provider advances most of each invoice’s value straight away and pays the balance, less fees, when your customer settles.
What are the main benefits of invoice financing?
The main benefits are fast access to cash, a facility that grows with your sales and no need to put up property as security. It also lets you offer longer payment terms to customers and take early payment discounts from suppliers.
How much of an invoice can I borrow?
Advances of 80% to 90% of the invoice value are common. The rest is released when your customer pays, less the provider’s charges.
How much does invoice financing cost?
Most facilities have a service fee, charged as a percentage of turnover, plus a discount charge on the money you draw. The total depends on the product, your turnover and the quality of your customers. Ask for every charge in writing.
What is the difference between factoring and discounting?
With factoring the provider collects payment from your customers and often runs your credit control. With discounting you collect payment yourself, and your customers usually do not know the invoices have been financed.
Will my customers know I use invoice finance?
With factoring they will, because they pay the provider. With confidential invoice discounting they normally will not, because payments go into an account in your name.
What happens if my customer does not pay?
On most facilities you must repay the advance if the invoice is still unpaid after an agreed period. Non-recourse and bad debt protection can shift some of that risk to the provider, at a higher cost.
Can I finance only some of my invoices?
Yes, through selective invoice finance. You choose which invoices to finance and pay only for those, though the cost per invoice is usually higher than on a whole-ledger facility.
Speak to a Specialist
Speak to a specialist commercial finance broker before you apply.
Commercial Finance Network is directly authorised and regulated by the Financial Conduct Authority. Invoice financing and other business finance is not regulated by the Financial Conduct Authority. Your property may be repossessed if you do not keep up repayments on a loan secured against it.
Call us on 03303 112 646 / 01494 622 111 or email info@cfnuk.com to discuss invoice financing for your business.
Related Pages
- Exploring Trade Finance – how UK businesses fund buying and selling across borders and on credit.
- Working Capital Loans – funding day-to-day operations for small businesses.
- Asset-Based Lending UK – borrowing against invoices, stock and plant in one facility.
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