Most businesses that sell to other businesses know the problem well: the work is done, the invoice is sent, and then nothing happens for weeks. Payment terms of 30, 60 or even 90 days are normal, but wages, suppliers and tax do not wait. That gap between doing the work and getting paid is where cash flow quietly strangles otherwise healthy companies. To close it, many UK businesses use invoice finance to release the cash locked up in unpaid invoices, often within a day or two of raising them.
This guide explains what invoice finance is, how it works step by step, the main types available, what it costs, and who it tends to suit, so you can see whether it is a good fit for your business.
What is invoice finance?
Invoice finance is a form of working capital funding secured against your unpaid sales invoices. Instead of waiting for customers to pay, you sell or borrow against those invoices and receive most of their value up front from a finance provider. When your customer eventually pays, you receive the remaining balance, minus the provider's fee.
It is an umbrella term rather than a single product. The two best-known forms are invoice factoring and invoice discounting, and there are more flexible variations besides. What they all share is the same basic idea: turning invoices you are owed into cash you can use now.
Because the funding is tied to your sales ledger, it behaves very differently from a fixed overdraft or a term loan. The more you invoice, the more funding becomes available, so the facility grows with your business rather than capping it.
How does invoice finance work?
The mechanics are straightforward and follow the same broad cycle whichever product you choose:
- You do the work and invoice your customer as normal, on your usual credit terms.
- You send the invoice details to your finance provider. Depending on the arrangement, this can be your whole sales ledger or selected invoices.
- The provider advances a percentage of the invoice value, typically around 80 to 90% and sometimes up to 95%, usually within 24 to 48 hours.
- Your customer pays the invoice in the normal way, either to you or directly to the provider, depending on the type of facility.
- The provider releases the remaining balance to you, minus their fee, once the invoice is settled.
As a simple example, a wholesaler owed £50,000 by a customer on 60-day terms might receive around £42,500 (85%) within a day of raising the invoice, then the remaining £7,500, less the provider's fee, once the customer settles 60 days later. Instead of waiting two months for the full amount, the business has the bulk of its cash almost immediately.
That cycle then repeats with each new invoice. Because fresh invoices continually enter the arrangement, invoice finance works as a rolling, dynamic source of working capital rather than a one-off injection.
The main types of invoice finance
Invoice finance is not one-size-fits-all. The right form depends on how much control you want to keep and whether you mind your customers knowing a provider is involved.
Invoice factoring. The provider advances funds and also takes over managing your sales ledger, chasing and collecting payment directly from your customers. This is usually a disclosed arrangement, so your customers know their invoices have been financed. It suits businesses that want to hand off credit control entirely, and it is often more accessible to smaller or newer companies.
Invoice discounting. You receive the advance but keep control of your own sales ledger and continue collecting payment yourself. Because you still deal with customers directly, the facility is usually confidential and they need not know it exists. It suits established businesses with a capable in-house credit-control function.
Selective or spot finance. Rather than committing your whole ledger, you finance individual invoices or a single customer's account as and when you need to. This offers maximum flexibility and can keep costs down if you only need to bridge occasional gaps.
Asset-based lending. A broader facility that combines invoice finance with funding secured against other business assets, such as stock, plant or property. It is generally used by larger businesses looking to raise more substantial working capital.
What does invoice finance cost?
Pricing usually has two components. There is a service (or management) fee, charged as a percentage of your turnover for running the facility, and a discount (or interest) charge, applied to the funds you actually draw and typically calculated over a base rate, much like interest on a loan.
Where you have the provider manage collections, as with factoring, the service fee tends to be higher because you are paying for that work. Where you keep collections in-house, as with discounting, it is often lower. When comparing facilities, look at the total cost, including any minimum fees, arrangement or renewal charges and the advance rate, rather than the headline percentage alone.
Who is invoice finance for?
Invoice finance is designed for businesses that sell to other businesses on credit terms. A few factors tend to determine suitability:
- You trade B2B. The funding is secured against commercial invoices, so businesses selling mainly to consumers will usually need a different form of funding.
- You have a trading history. Providers look for an established pattern of invoicing and reliable customers, though newer businesses can often still access factoring.
- Your customers take time to pay. The product is most valuable where invoices are settled over 30 to 90 days, which is exactly the gap it is designed to bridge.
- Your turnover meets the provider's threshold. Traditional facilities often start from a higher turnover, while specialist providers support smaller businesses.
The benefits, and what to weigh
The appeal of invoice finance is clear. It releases cash quickly, scales with your sales, requires no additional security beyond the invoices themselves, and can reduce reliance on overdrafts and loans. For a growing business, it can be the difference between accepting the next order and turning it away.
There are trade-offs to weigh, too. It carries a cost that reduces your margin, most facilities leave you liable if a customer fails to pay unless you add bad-debt protection, and discounting in particular relies on you having the systems to keep collecting payment effectively. None of these is a reason to rule it out, but each is worth factoring into the decision.
Is invoice finance right for your business?
If your cash is regularly tied up in unpaid invoices, your customers are other businesses, and long payment terms are holding back your growth, invoice finance is well worth considering. The choice between factoring and discounting then comes down to whether you would rather hand over collections or keep them in-house and confidential. Weigh the cost against the value of being paid sooner, and the answer usually becomes clear.
Frequently asked questions
How quickly can I access the funds? Usually within 24 to 48 hours of submitting an invoice, with the balance released once your customer pays.
How much of each invoice can I access up front? Typically around 80 to 90% of the invoice value, and sometimes up to 95%, with the rest paid to you (minus fees) on settlement.
What is the difference between factoring and discounting? With factoring, the provider collects payment from your customers and the arrangement is usually disclosed. With discounting, you keep collecting payment yourself and the facility is usually confidential.
Does invoice finance add debt to my business? It is funding advanced against money you are already owed rather than new borrowing against future performance, and it generally requires no security beyond the invoices themselves.
What happens if my customer does not pay? On a recourse facility the debt ultimately comes back to you. Optional bad-debt protection can cover that risk in exchange for a higher fee.
Can a small or new business use invoice finance? Often, yes, particularly factoring, where the provider manages collections and underwrites your customers. Discounting usually requires a higher turnover and an established credit-control process.
Is invoice finance only for B2B businesses? Broadly, yes. It is built for businesses that invoice other businesses on credit terms, so companies selling mainly to consumers will usually need a different option.
This article is for general information only and does not constitute financial advice. Invoice finance costs, eligibility criteria and terms vary between providers and can change over time, and every business's circumstances are different. Always speak to a qualified professional before entering into an invoice finance arrangement.
