Invoice finance is one of the most effective ways for businesses to improve cash flow by freeing up cash from their outstanding invoices, rather than waiting for customers to pay.
This page covers how invoice finance works, what it might cost, and whether your company could benefit from it.
By the end, you should have a clear understanding of whether this funding method is right for you.
- What is Invoice Finance?
- Pros and Cons
- Types of Invoice Finance
- How Does Invoice Finance Work?
- How Much Does Invoice Finance Cost?
- Is My Business Eligible?
- What are the Risks of Using an Invoice Finance Company?
- What is the Difference Between Invoice Financing and Factoring?
- What is Single or Selective Invoice Finance?
- Is Invoice Finance Regulated in the UK?
- Why has Invoice Financing Achieved Such Success?
- What is Import Invoice Financing?
- Is Invoice Finance Suitable for Small Businesses?
- Alternatives to invoice finance
- Which are the Best Invoice Finance Companies?
What is Invoice Finance?
Invoice finance transforms unpaid invoices into near-immediate working capital. Rather than waiting weeks or even months for clients to settle, a finance provider advances a significant share of each invoice’s value soon after it’s raised. This approach has gained popularity in the UK as an accessible alternative to traditional loans, helping businesses maintain healthy cash flow across a broad range of sectors, from manufacturing and construction to recruitment and professional services.
Pros and Cons of Invoice Finance
- Speeds up cash flow, reducing the wait for customer payments
- Can be easier to arrange than a standard bank loan
- Grows in line with sales, providing ongoing working capital
- May offer flexibility with rolling or ad-hoc invoices
- Interest rates and fees can be higher than traditional lending
- Providers may require visibility of your sales ledger
- Some arrangements include charges for early repayment or underuse
- Reliance on timely customer payments remains a risk
Types of Invoice Finance
Invoice Factoring
In invoice factoring, you sell your unpaid invoices to a finance provider, which advances a large portion of each invoice’s value.
The finance provider then manages credit control and collects payment from your customers. Once the invoices are settled, you receive the remaining balance minus fees.
This option can be helpful for smaller businesses that prefer not to handle collections themselves.
Invoice Discounting
Like factoring, invoice discounting offers an upfront portion of your invoice values, but your business continues to oversee credit control.
Because you remain responsible for collecting payments, customers typically do not know you are using a finance provider.
This arrangement suits businesses that already have a solid credit-control process and want to preserve direct relationships with their clients.
Selective Invoice Finance
Also known as single or spot factoring, selective invoice finance lets you choose which invoices to finance, rather than using your full sales ledger.
You raise funds only when necessary, making it more flexible than standard factoring or discounting. It works well for businesses that have sporadic cash flow needs and do not want a long-term commitment.
Other Variations
Some specialist providers offer confidential invoice discounting, where customers remain unaware of the financing arrangement. Or construction invoice finance, which addresses the unique payment patterns in the building industry.
In addition, import or export finance can help businesses operate across borders by covering shipping and other international costs while awaiting payment from overseas clients.
These variations follow the same principles as factoring and discounting but are tailored to the challenges of specific sectors or business models.
How Does Invoice Finance Work?
Invoice finance operates by providing businesses with immediate access to funds tied up in their outstanding invoices. The process typically follows these steps:
- Issue Invoices: Your business provides goods or services and sends an invoice as usual, detailing the payment terms.
- Submit Details: You share the invoice information with the finance provider, including its amount, due date, and customer details.
- Receive an Advance: Once approved, you get a percentage of the invoice value (often between 80% and 90%), giving you faster access to the cash.
- Customer Payment: Clients pay according to their terms. In factoring agreements, the finance provider typically handles collection. With discounting, the customer pays into a designated account, and you remain responsible for following up on payments.
- Balance and Fees: After the customer settles, you receive the remaining portion of the invoice total, minus service fees and any applicable discount charges.
- Ongoing Cycle: As long as you continue to issue invoices and maintain a valid agreement, you can tap into this funding method repeatedly to support everyday cash flow.
How Much Does Invoice Finance Cost?
Most providers divide their charges into two main categories: a service fee and a discount charge.
The service fee is typically a small percentage of the overall invoice value or total turnover, covering tasks like credit checks and invoice management.
The discount charge, which acts like interest on the advanced funds, is usually a few percentage points above a base rate and accrues daily until your customers pay.
Rates vary depending on factors like industry type, invoice volume, and the perceived risk of late payment.
It is always wise to confirm whether there are additional charges, such as minimum fees, early termination penalties, or separate costs for extended payment terms, before signing any agreement.
Is My Business Eligible for Invoice Finance?
In most cases, a provider will want to see that you primarily issue invoices to other businesses under standard payment terms and can show an ongoing flow of sales. Being incorporated as a limited company or LLP helps, as it reassures lenders that your finances are kept separate from personal liabilities.
Some providers have a minimum annual turnover requirement, often starting around £50,000, along with a base level of monthly invoicing to ensure a steady revenue stream.
They may also review your customers’ reliability in settling invoices on time since the lender’s risk hinges on whether those payments materialise.
If you can demonstrate these factors, invoice finance becomes a realistic way to bridge cash flow gaps and sustain day-to-day operations.
What are the Risks of Using an Invoice Finance Company?
You could face extra fees if your customers are consistently late with their payments, which undercuts the cash flow benefit you hoped to gain.
In factoring arrangements, the finance provider may deal directly with your clients, so any mishandling on their part can harm customer relationships. Non-recourse factoring protects you from bad debts but usually costs more.
Before signing, check whether there are early termination fees or monthly usage requirements, so you know exactly what you are agreeing to.
Alternatives to invoice finance
If you decide invoice finance is not a perfect fit, there are other ways to keep your cash flow healthy.
Secured or unsecured business loans provide lump sums over longer terms, although approval may take more time.
An overdraft can cover shortfalls without committing to a larger funding arrangement, but it often has strict limits and possibly higher interest.
Business credit cards are an option for everyday expenses, though they can carry fees and interest if you do not clear the balance on time.
Remortgaging or taking out a second-charge loan might help if you own property with sufficient equity, but you risk that asset if you fail to keep up repayments.
Research each route carefully, focusing on interest rates, fees, and repayment conditions, to find a solution that aligns best with your operational needs.
Which are the Best Invoice Finance Companies?
We have asked every single one of our providers to create some content outlining their strengths. We hope the following will prove useful to help you research your decision. You can read the article here.
We have produced this infographic to help you understand the process.
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Invoice Finance FAQs
It depends on the arrangement. In factoring, the provider handles collections on your behalf, whereas discounting leaves you in charge of following up with customers.
Yes. Selective (or single) invoice finance allows you to pick individual invoices to fund rather than using your whole ledger. This can help if you only need occasional cash flow boosts.
It is largely self-regulated, so terms and fees can vary from one provider to another. Always read the contract carefully, and consider a provider with a solid track record and industry accreditation.
Decisions are often faster than typical bank loans because approvals focus on your customers’ creditworthiness as well as your own trading history. Some agreements can be in place within a few days.
Most providers charge extra fees or higher discount rates if invoices remain outstanding longer than expected. With non-recourse factoring, the finance company assumes the risk of non-payment, though this usually carries higher overall costs.
