Late-paying customers are the single most common reason a profitable UK company runs out of cash. You have done the work, raised the invoice, and now you wait. Thirty days. Sixty days. Ninety days on some contracts. Meanwhile the wages, the VAT, the suppliers and the rent do not wait. Invoice finance exists to close that gap: it turns the money your customers already owe you into cash you can use today.
This guide answers the question what is invoice finance from first principles, and then goes further than most. It explains the difference between factoring and invoice discounting, what a facility genuinely costs once you annualise it, who qualifies and who does not, and, importantly, the sectors where invoice finance is the wrong tool and something else fits better. It is written for directors and finance leads of UK limited companies. If your business is paid on credit terms by other businesses, this is your map.
We are not a lender. We introduce your company to a panel of commercial-finance brokers who arrange facilities across the whole market, and we help with the accounting and tax that sits around the decision. Everything below is B2B and geared to companies. There is a short note on why that matters legally in the section on regulation.
What Invoice Finance Actually Is
Invoice finance is a way of borrowing against your unpaid sales invoices. Instead of waiting for a customer to pay, a funder advances you most of the invoice value straight away and releases the rest, minus their fee, once the customer settles. The security is the debtor book itself. Your outstanding invoices are the collateral, which is why invoice finance is often available to companies that would struggle to get an unsecured loan of the same size.
The mechanics are simple in outline. You raise an invoice to a business customer on normal credit terms. You upload it to the facility. The funder advances an agreed percentage, typically between 70% and 90%, usually within a day. When your customer pays, the funder takes the outstanding balance plus their charges and passes the remainder to you. The facility revolves: as you raise new invoices, more funding becomes available, and as customers pay, the drawn balance falls. It grows with your sales in a way a fixed-term loan never can.
Three features define any facility and you should nail all three before signing:
- The advance rate, the percentage of each invoice released up front (say 85%).
- Recourse or non-recourse, who carries the loss if a customer never pays.
- Disclosed or confidential, whether your customers know a funder is involved.
Get those three right for your business and the rest is pricing and paperwork. Get them wrong and you will either overpay or be exposed on a risk you thought was covered.
Factoring vs Invoice Discounting vs Selective
The invoice finance family has three main members. They do the same core job, releasing cash against invoices, but they differ on who runs credit control, whether customers know, and how much of the ledger is committed.
Factoring
With factoring, the funder buys your sales ledger and takes over credit control. Your customers are notified (this is a disclosed facility) and pay into a trust account the funder controls. The funder chases overdue accounts, sends statements and allocates receipts. You get the up-front advance plus an outsourced credit-control department. This suits companies with a thin finance team, a lot of small customers, or a persistent chasing problem. You pay for the service through a higher fee.
Invoice discounting
With invoice discounting, you keep your own credit control and, in a confidential facility, your customers are never told a funder is involved. They pay into a bank account in your company name that is assigned to the funder. You send the money on (or it sweeps automatically). Because you do the chasing and carry the administrative burden, discounting is cheaper, but funders reserve it for companies with the systems, the covenant and the turnover to run their own collections reliably. Confidential invoice discounting (CID) is the version most established companies want, and we cover it in depth on the invoice discounting guide.
Selective and spot factoring
Selective (or spot) facilities let you fund individual invoices or individual customers rather than assigning the whole ledger. You pick what to finance. This suits occasional or one-off cash needs, or funding a single large invoice without committing the entire book. It costs more per invoice but avoids minimum-usage fees and long notice periods, so for light, irregular use it can be the cheapest option overall.
| Feature | Factoring | Invoice discounting (CID) | Selective / spot |
|---|---|---|---|
| Who runs credit control | The funder | Your company | Usually your company |
| Customers notified | Yes (disclosed) | No (confidential) | Varies |
| Whole ledger committed | Yes | Yes | No, pick invoices |
| Typical cost | Higher (service included) | Lower | Higher per invoice |
| Best for | Small teams, many debtors | Established firms, strong systems | Occasional or one-off needs |
The right choice is rarely about price alone. It is about who is going to do the chasing, whether confidentiality matters to your customer relationships, and how predictable your funding need is. Our fuller breakdowns live on the invoice factoring guide and the discounting guide linked above.
One more distinction worth knowing is asset-based lending (ABL). A full ABL facility stacks invoice finance together with funding lines secured on stock, plant, property and sometimes forward orders, giving a larger and more flexible facility than invoice finance alone. ABL suits bigger, asset-rich companies, and mergers, acquisitions or turnarounds where several asset classes are funded at once. For most trading companies, straightforward factoring or confidential discounting against the sales ledger is all that is needed, and it is where the whole-of-market panel we introduce to competes hardest on rate.
How Invoice Finance Works Step by Step
Here is the full cycle for a whole-turnover facility, from onboarding to the money landing in your account.
- Survey and set-up. The funder audits your sales ledger, checks your customers' creditworthiness, sets an advance rate and per-customer credit limits, and puts a debenture and legal agreement in place. This takes one to three weeks.
- Raise and upload. You invoice your business customer as normal and upload the invoice (often via an automated feed from your accounting software).
- Verification. The funder confirms the invoice is valid and within the customer's credit limit. Disputed, contra or out-of-terms invoices may be excluded or funded at a lower rate.
- Advance. The agreed percentage is released, commonly within 24 hours of verification.
- Collection. Under factoring the funder collects; under discounting you collect and the funds sweep to the funder.
- Reconciliation. When the customer pays in full, the funder releases the balance to you, less the service fee and the discount charge for the days the money was advanced.
The key point is that the discount charge only runs while cash is actually drawn. Pay an invoice off early and the interest stops. This is what makes invoice finance efficient for genuine working-capital gaps: you pay for the cash you use, for the days you use it, not for a fixed lump you did not need.
What Invoice Finance Costs
Two charges dominate every facility, and a handful of smaller ones can catch you out.
The service fee
The service fee (called the factoring fee where credit control is included) is a percentage of the gross turnover you put through the facility, commonly between 0.5% and 3%. It covers administration and, in a factoring facility, the credit-control service. A whole-turnover facility with lots of small invoices sits higher; a low-volume, high-value ledger sits lower.
The discount charge
The discount charge is interest on the funds you draw, usually quoted as a margin over Bank of England base rate (for example base plus 2.5%). It applies only to money actually advanced and only for the days it is out. This is the true cost of the borrowing, as opposed to the cost of the service.
The fees that ambush you
Watch for the arrangement fee (one-off, set-up), the minimum-usage fee (charged if your turnover through the facility falls below an agreed floor), the renewal fee, the disbursement or CHAPS charge on each payment, and, most importantly, the termination notice period. Many facilities require 90 days' notice to exit and charge fees during it. Committing to a whole-turnover facility is a bigger decision than the headline rate suggests, and the exit terms are where the real cost of a bad fit shows up.
A worked example: what a £30,000 invoice really costs
Take a company with a £200,000 sales ledger, customers on 60-day terms, on a facility offering an 85% advance, a 1.5% service fee and a discount margin of 2.5% over a 4.75% base rate (so 7.25% a year on drawn funds). It raises a £30,000 invoice and the customer pays after 45 days.
| Element | Calculation | Cost |
|---|---|---|
| Cash released day one | 85% of £30,000 | £25,500 advanced |
| Service fee | 1.5% of £30,000 | £450 |
| Discount charge | £25,500 × 7.25% × 45/365 | £228 |
| Total cost of financing this invoice | £450 + £228 | £678 |
That £678 is 2.7% of the £25,500 you actually had use of, for 45 days. Annualise it (multiply by 365/45) and the effective cost of the cash is roughly 21% a year. That is not a criticism of invoice finance; it is the discipline you need to apply. A headline that reads "1.5% plus base rate" feels cheap, but the real question is the annualised cost of the funds you draw against the value they unlock. If that £25,500 lets you take a 5% early-settlement discount from a supplier, win a contract you would otherwise decline, or simply meet payroll without a covenant breach, it pays for itself many times over. If you are financing invoices out of habit rather than need, it does not. Always run the annualised number.
Recourse vs Non-Recourse
This is the risk question, and directors get it wrong more often than any other. Recourse and non-recourse describe what happens when a customer never pays.
Under a recourse facility, the bad-debt risk stays with your company. If an approved invoice goes unpaid beyond a set period (typically 90 to 120 days), the funder recovers the advance from you, usually by offsetting it against the funding available on your other invoices. You get the cash-flow benefit, but you keep the credit risk. Recourse facilities are cheaper.
Under a non-recourse facility, the funder carries the loss on approved invoices if a customer becomes insolvent or fails to pay, up to the credit limit set for that customer and subject to the policy conditions. This is effectively bundled bad-debt protection (sometimes provided through a separate credit insurance policy). It costs more, and the protection only extends to invoices the funder approved within the agreed limit. An invoice raised above a customer's credit limit, or one in dispute, is typically not covered even under a non-recourse facility.
The honest position: non-recourse is not a magic shield. It protects you against a customer's insolvency, not against your own disputes, contra-charges or credit notes. If your risk is one large customer going under, non-recourse or standalone credit insurance earns its cost. If your risk is a customer disputing quality and refusing to pay, no facility covers that, and you need better contracts and sign-offs, not more finance.
Who Qualifies, and Who Does Not
Invoice finance is easier to obtain than most business borrowing, because the funder is lending against your customers' ability to pay rather than your own trading history. But it is not for everyone, and the honest fit test is what separates a good adviser from a lead-hungry one.
Companies that qualify well
- You are a UK limited company or LLP invoicing other businesses on credit terms (30, 60 or 90 days).
- Your debtor book is reasonably spread, so no single customer dominates it.
- Your invoices are for completed, undisputed work or delivered goods.
- Your customers are creditworthy businesses that pay, eventually.
Companies that do not fit
- Business-to-consumer firms paid at point of sale. Retail, restaurants, cafes, most B2C ecommerce. There is no unpaid trade-debtor book to advance against. These companies want a merchant cash advance, a working-capital facility or a revolving credit line instead.
- Contract sectors with heavy retentions or staged applications. Construction subcontractors invoice via applications for payment with retentions held for months. Standard factoring often declines this; it needs a specialist construction-finance facility.
- Businesses with a single dominant customer. Extreme debtor concentration makes funders nervous and pushes the advance rate down.
- Cash-in-advance or pro-forma businesses. If customers pay before you deliver, there is no invoice to finance.
Saying "this is the wrong product for you" is not us turning away business; it is the reason to trust the pages that say otherwise. Our ten sector guides go through the fit test in detail for recruitment agencies, construction, manufacturing, wholesale, haulage, cleaning companies, security firms, and, with an honest "usually not the right tool" verdict, ecommerce, hospitality and dentists.
Confidential vs Disclosed Facilities
Confidentiality is the feature directors ask about most, usually because they worry that using invoice finance signals distress to customers. The reality is more nuanced.
A disclosed facility (all factoring, and some discounting) tells your customers to pay the funder. They see the funder's name on remittance instructions and may be chased by the funder's credit-control team. Some directors dislike this. In practice, outsourced credit control is common, professional, and often improves payment times, because a dedicated team chases more consistently than a stretched internal one.
A confidential facility (confidential invoice discounting) keeps the funder invisible. Customers pay into an account in your company name and are never told. You run your own credit control and the customer relationship is unchanged. Funders reserve confidential facilities for companies with strong systems and covenant, because they are trusting you to collect and remit accurately. If confidentiality genuinely matters to your business, ask for a confidential facility from the outset and expect the eligibility bar to be higher.
Invoice Finance vs a Loan vs an Overdraft
Invoice finance is one working-capital tool among several. Choosing the right one starts with the cause of your cash-flow gap, not the product.
| Product | How it works | Best when |
|---|---|---|
| Invoice finance | Revolving advance against your sales ledger; grows with turnover; self-liquidates | The gap is caused by customers paying on credit terms |
| Business loan | Fixed lump sum, fixed term, repaid regardless of sales | A one-off capital need: acquisition, fit-out, expansion |
| Overdraft / revolving credit | Flexible limit, draw and repay, interest on the drawn balance | Small, unpredictable, short-term swings |
| Asset finance | Spreads the cost of equipment or vehicles over their useful life | Buying plant, machinery or vehicles |
The distinguishing feature of invoice finance is that the funding scales with your sales. A loan is a fixed amount that may be too small next year and too large this year. Invoice finance releases more as you invoice more, which is exactly what a growing company with lengthening customer terms needs. For the alternatives, see our business loans guide, our asset finance guide, and the umbrella working-capital finance guide that maps each cash-flow cause to the right product.
How to Apply and What Lenders Assess
When a funder looks at your company for invoice finance, they are underwriting your customers as much as you. Expect them to assess:
- The quality of your debtor book. How many customers, how spread, how creditworthy, and their payment history.
- Debtor concentration. A book where one customer is 40% or more of turnover attracts a lower advance rate or a concentration cap.
- Dilution. The proportion of your ledger lost to credit notes, disputes, contra-trading and returns. High dilution worries funders more than slow payment.
- Your systems and reporting. Especially for confidential discounting, where they rely on your collections.
- The nature of your contracts. Retentions, stage payments, pay-when-paid clauses and set-off rights all reduce the value of an invoice as security.
To get the best terms, present a clean, well-spread ledger, up-to-date management accounts, and evidence of low dilution. A broker who quotes across a whole panel will match your profile to the funder most comfortable with it, which is usually where the best advance rate and lowest fee come from. That is the value of an introduction over approaching a single high-street funder.
Before you apply, have four things ready: a recent aged debtor report showing your ledger by customer and age, twelve months of management accounts, a note of your standard payment terms and any contracts with retention or set-off clauses, and a realistic figure for your monthly funding need. The clearer that picture, the faster the survey and the sharper the quotes. A funder rarely declines a well-run B2B ledger; what slows things down is missing information and unexplained dilution, both of which you can fix before the first conversation.
The Tax Treatment, in One Paragraph
Invoice finance is a financing arrangement, not a tax event, so the tax angle is light. Service fees and discount charges incurred wholly and exclusively for your company's trade are generally allowable as ordinary finance and administration costs when computing your corporation tax profits, in the same way as other borrowing costs. The VAT position varies by charge and facility, so ask the funder for a VAT breakdown. There is no capital-allowances question here, unlike asset finance, because you are financing receivables, not buying an asset. If financing costs interact with your VAT registration position (for example, a growing turnover approaching the £90,000 threshold), read our VAT registration threshold guide and speak to your accountant. This is general information, not tax advice on your specific facility.
Company Borrowers Only: the Regulatory Position
Company borrowers only. The finance introductions on this page are for UK limited companies and limited liability partnerships borrowing for business purposes. We introduce your company to a panel of commercial-finance brokers; we are not a lender and do not give regulated credit advice. If you are a sole trader, an individual, or borrowing for personal or household purposes, this service is not for you and you should speak to an FCA-authorised consumer-credit firm.
The reason for the fence is legal, not arbitrary. Introducing a body corporate (a limited company) to a lender for business borrowing is not a regulated activity under Article 36A of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Consumer borrowing by individuals, sole traders and small partnerships falls inside the consumer-credit regime and requires FCA authorisation. Because we deal only with companies borrowing for business purposes, the introduction sits outside that regime. That is why every page in this cluster frames the reader as a company and gates the enquiry form on the question "Is your business a limited company?" If the answer is no, we route you to general accounting help rather than to a finance panel. The invoice finance facility your company ultimately signs is a commercial contract between the company and the funder.
Choosing Your Next Step
Invoice finance is one of the most useful tools a UK company can have when the only thing standing between it and growth is the time customers take to pay. Used well, against a clean B2B debtor book, for a genuine working-capital need, it releases cash you have already earned at a cost that is easy to justify. Used out of habit, or forced onto a business model it does not fit, it becomes an expensive way to paper over a different problem.
Start with two questions. Do you have an unpaid B2B sales ledger? And is the cash gap caused by customer payment terms rather than by a one-off capital need or a B2C, point-of-sale revenue model? If yes to both, invoice finance is very likely the right tool, and the choice narrows to factoring or discounting, recourse or non-recourse, disclosed or confidential. If no, one of the other products in this cluster fits better, and we would rather point you there.
Whichever way it goes, the enquiry form below is the fastest route to real numbers. Give us your turnover, debtor book and payment terms, and we will introduce your limited company to the brokers best placed to quote for it.
This guide is general information for UK limited companies and does not constitute regulated financial, credit or tax advice. Facility terms, advance rates and costs vary by funder and by the profile of your business. Always review the specific agreement and take advice appropriate to your circumstances. Sources: British Business Bank on invoice finance; UK Finance, invoice finance and asset-based lending; gov.uk business finance and support; The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001; HMRC Business Income Manual (finance-cost deductibility).