Invoice finance allows businesses to access money tied up in unpaid customer invoices rather than waiting 30, 60 or 90 days to be paid.
The finance provider advances a proportion of the value of eligible invoices, giving the business earlier access to working capital.
The two main types of invoice financing for business funding are invoice factoring and invoice discounting.
Both can improve cash flow, but they differ in who manages customer payments, how visible the arrangement is to customers and the type of business they are typically suited to.
This guide explains how invoice finance works in the UK, the difference between factoring and invoice discounting, typical costs and eligibility requirements, and when it may be a suitable form of business funding.
Invoice finance is a form of business funding that uses unpaid customer invoices to support borrowing.
Instead of waiting for customers to settle their invoices, a business can receive a proportion of their value from an invoice finance provider earlier.
For example, suppose your business issues a customer invoice for £50,000 with 60-day payment terms.
Rather than waiting two months for the full £50,000, an invoice finance provider might advance a significant proportion of the invoice shortly after it is raised.
When the customer eventually pays, the remaining balance is released after the provider deducts its agreed charges.
The British Business Bank describes invoice finance as a way for businesses to bridge the working-capital gap between supplying goods or services and receiving payment from customers.
Although individual facilities vary, the process generally works like this:
Your business completes work for another company and issues an invoice.
For example:
Invoice value: £100,000
Payment terms: 60 days
The invoice is made available to the finance provider according to the terms of the agreement.
The provider releases an agreed percentage of the invoice value.
The British Business Bank notes that invoice finance providers may advance up to around 80% or 90% of eligible invoice values, although the actual percentage depends on the provider's risk assessment.
Using an illustrative 85% advance:
Invoice value: £100,000
Advance rate: 85%
Initial funding: £85,000
The customer eventually settles the £100,000 invoice.
Who collects that payment depends on whether you are using factoring or invoice discounting.
The remaining value is paid to the business after the provider deducts the applicable fees and finance charges.
This effectively converts outstanding invoices into a source of working capital.
The two main types are:
Other arrangements such as selective invoice finance and spot factoring also exist.
However, factoring and discounting account for the main distinction most businesses need to understand.
Invoice factoring combines finance with sales-ledger and credit-control support.
The factoring company typically:
Because the provider is involved in collections, customers will generally know that the business is using a factoring facility.
Factoring may therefore provide both:
Funding – earlier access to invoice value.
Administration – outsourced credit control and payment collection.
The British Business Bank notes that factoring is often more accessible to smaller businesses and that providers may also carry out customer credit checks and support sales-ledger management.
Invoice discounting provides finance against unpaid invoices but normally leaves the business responsible for collecting payment from customers.
The company continues to manage:
The provider primarily supplies the finance facility.
Invoice discounting is therefore usually more suitable for businesses with established financial controls and an effective internal credit-control function.
The British Business Bank says invoice discounting is more commonly used by established businesses with larger turnovers, although availability for smaller companies is increasing.
Many invoice discounting facilities are confidential or undisclosed.
This means customers may not be aware that the business is using invoice finance.
The company continues to:
This differs from factoring, where the provider generally becomes visibly involved in collecting the debt.
Confidential invoice discounting can appeal to established businesses that want working-capital funding without changing the way their customers interact with them.
The main difference is who controls the sales ledger and customer collections.
|
Invoice Factoring |
Invoice Discounting |
|
Provider typically manages collections |
Business normally manages collections |
|
Customer usually knows a factor is involved |
Can often be confidential |
|
Includes credit-control support |
Primarily a finance facility |
|
Often suitable for smaller businesses |
Often used by larger or more established businesses |
|
Service charge can be higher |
Service charge may be lower |
|
Less internal credit-control resource required |
Strong internal credit-control systems normally needed |
Both release cash against unpaid invoices.
The right option depends on how much control you want to retain and whether your company already has the systems needed to manage receivables effectively.
Suppose a business has £500,000 of eligible unpaid invoices.
If a provider makes 85% available:
Invoice ledger: £500,000
Advance rate: 85%
Potential availability: £425,000
With factoring, the provider may then:
With invoice discounting, the business would usually:
The underlying funding principle is similar.
The service surrounding it is different.
Selective invoice finance allows a business to finance particular customer accounts or groups of invoices rather than entering a facility covering the entire sales ledger.
This can provide greater flexibility where finance is only needed:
Spot factoring allows individual invoices to be financed.
For example, a business might have one unusually large £150,000 invoice but no ongoing requirement to finance the rest of its debtor book.
Instead of taking a full ongoing factoring facility, it may be possible to finance that individual invoice.
Selective and spot facilities can be useful where working-capital requirements are occasional rather than permanent. The British Business Bank recognises both as alternatives to traditional ongoing factoring and discounting arrangements.
Invoice finance is mainly relevant to B2B businesses that sell on credit terms.
Potential users include:
It can be especially useful where a company is profitable and growing but has significant cash tied up in its debtor book.
The main reason is working capital.
Imagine a company that:
Even if the company is profitable, there is a timing mismatch.
Cash leaves the business before customer payments arrive.
Invoice finance can help bridge that gap.
Growth can actually increase working-capital pressure.
Suppose a business doubles monthly sales from £200,000 to £400,000.
That sounds positive.
But if customers pay after 60 days, the amount tied up in unpaid invoices can also rise substantially.
The company may need more money for:
before receiving cash from its increased sales.
Because invoice finance availability can increase as the eligible debtor book grows, it can potentially scale alongside the business. The British Business Bank describes this as a dynamic working-capital facility where increased invoice activity can unlock additional funding.
The biggest advantage is reducing the wait between issuing an invoice and accessing some of its value.
Once an established facility is operating, funding against new invoices can often be made available quickly.
The cash released can potentially be used for:
As more eligible invoices are raised, the amount of available funding can increase.
The debtor book is already an asset on the company's balance sheet.
Invoice finance allows the business to make use of that asset as a source of funding.
With factoring, the provider takes responsibility for some or all of the sales-ledger and collection activity.
This can save internal time and resources.
Because the provider considers the quality of the debtor book and customers as part of the assessment, invoice finance can work differently from a conventional unsecured business loan.
Businesses pay for the funding and, where relevant, the additional services.
Because the factor manages payment collection, customers will usually know a third-party provider is involved.
Some businesses may prefer to retain direct control.
Providers may exclude invoices or customers that do not meet their criteria.
Because availability is based on unpaid invoices, a reduction in sales can reduce the amount of funding available.
Invoice finance should therefore not be treated as a fixed pool of capital.
Invoice financing changes the timing of cash receipts.
It does not turn loss-making sales into profitable ones.
The British Business Bank specifically cautions that invoice finance advances cash flow and is not a substitute for an underlying sustainable business model.
Pricing depends on the provider and structure.
Common charges may include:
A fee for operating the facility.
For factoring, this may also cover:
This works in a similar way to interest.
It is generally calculated on the amount of funding actually being used.
Depending on the agreement, there may also be charges relating to:
Because factoring includes additional administrative support, its service charge may be higher than a comparable invoice discounting arrangement.
Some providers offer protection against customers failing to pay because of insolvency or other covered circumstances.
This may be offered alongside factoring or invoice discounting.
It can reduce exposure to certain customer defaults but normally comes at an additional cost.
Businesses should check:
Bad-debt protection should not be confused with the normal funding facility itself.
The amount available is directly connected to the value and quality of eligible outstanding invoices.
For example:
Eligible debtor book: £600,000
Advance rate: 85%
Potential availability could be:
£510,000
subject to provider criteria.
However, a provider may reduce availability where there are concerns such as:
The British Business Bank notes that advance rates often reach around 80% or 90%, but the provider determines the actual amount based on its assessment of the business and debtor book.
Customer concentration occurs when a large proportion of the company's invoices relate to one or a small number of customers.
For example:
Total debtor book: £500,000
Amount owed by one customer: £300,000
That one customer represents 60% of the outstanding invoices.
A provider may view this as additional risk because a problem with that customer could affect a significant proportion of the facility.
Exact requirements vary, but providers generally prefer invoices that:
Old, disputed or unusual invoices may not qualify.
Eligibility varies by provider, but businesses commonly need to:
The provider may consider:
The British Business Bank notes that providers generally look at both the established trading history of the business and the quality of its outstanding invoices.
An invoice finance provider may ask for:
The debtor book is particularly important because it forms the basis of the facility.
Invoice finance and conventional business loans can both provide working capital, but they work very differently.
|
Invoice Finance |
Business Loan |
|
Funding linked to unpaid invoices |
Fixed borrowing amount |
|
Availability can grow with invoices |
Loan amount normally agreed upfront |
|
Often used for working capital |
Can fund many purposes |
|
Relies partly on debtor quality |
Relies heavily on business affordability |
|
Ongoing facility |
Often fixed-term |
|
Can include credit-control services |
Does not normally include collections |
A conventional loan may suit a defined project.
Invoice finance may suit an ongoing working-capital requirement linked directly to sales.
Read Business Loans and Debt Finance: How They Work for more information.
Both can help manage short-term cash flow.
An overdraft gives the business an agreed borrowing limit linked to its bank account.
Invoice finance is linked directly to receivables.
For businesses with substantial B2B invoicing, invoice finance may provide greater funding capacity because availability can increase as the debtor book grows.
The appropriate option depends on:
A working capital loan typically provides a fixed amount of finance.
Invoice financing works dynamically against outstanding receivables.
This means invoice finance may be particularly relevant where working-capital pressure rises as sales increase.
Read Working Capital Finance: Funding Day-to-Day Business Needs for a wider comparison.
Invoice finance can be suitable for smaller B2B companies where customer payment terms create significant cash-flow pressure.
Factoring can be particularly relevant where the company does not have a large internal credit-control department because the provider can help manage collections.
Invoice discounting generally requires stronger internal systems because the business retains control of the sales ledger.
The British Business Bank notes that factoring has historically been easier for smaller businesses to access, while discounting is more commonly associated with larger established businesses.
Read Small Business Funding: Finance Options for UK Businesses for a wider look at SME funding.
Invoice finance generally works best for businesses that:
A pre-revenue startup therefore has nothing to finance through an invoice facility.
Some younger companies with genuine customer invoices may still have options, but provider criteria vary.
For businesses that have not yet built meaningful invoice activity, other startup funding routes are likely to be more relevant.
Read Startup Funding in the UK: Options for New Businesses for more information.
Yes.
One of its strongest use cases is supporting working capital during growth.
Suppose a business wins a major contract.
The company may need to:
before the new customer pays its invoices.
Invoice finance can potentially release cash from those sales earlier, helping finance the increased operating costs.
Potentially, although it is not usually the only form of acquisition funding.
If an acquired company has a substantial eligible debtor book, invoice finance may form part of the wider transaction or post-acquisition funding structure.
For example, acquisition funding could involve:
The invoice facility might help ensure the business has sufficient working capital after completion rather than financing the full purchase price itself.
For the broader options, read our guide to financing a business purchase.
The decision largely comes down to how much control your business wants and how strong its internal financial systems are.
Before entering an agreement, ask:
These details can significantly affect the overall value and flexibility of the arrangement.
Invoice finance can be a useful working-capital solution for businesses that are profitable but regularly wait for customers to pay.
It can help release cash earlier, support growth and reduce pressure created by long payment terms.
The most appropriate form depends largely on how much control the business wants over customer collections.
Factoring combines finance with sales-ledger and credit-control support.
Invoice discounting gives the business access to funding while it generally retains responsibility for collections.
Before choosing either, assess:
For a wider comparison of invoice finance alongside loans, asset finance, equity and other funding options, read Types of Business Funding: Which Option Is Right for You?
Buying an established business is not only about funding the purchase price. You also need to consider how much working capital the company will require after completion.
If the business sells to other companies on credit terms and has significant cash tied up in unpaid invoices, invoice finance may potentially form part of the post-acquisition funding strategy.
At Valius, we help buyers discover established businesses for sale and navigate the wider acquisition journey, including valuation, due diligence, funding and deal structure.
Understanding a target company’s debtor book, customer payment terms and working-capital requirements before completion can help you assess how much cash the business will need once ownership transfers.
In the right circumstances, facilities such as invoice finance can help release cash from existing sales and give the acquired business more room to operate and grow.
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