What Is Invoice Finance?

What is invoice finance?

Invoice finance is a form of business funding where a company borrows against its unpaid sales invoices instead of waiting for customers to pay. A funder advances most of each invoice's value, typically 70%–90%, within about 24 hours of the invoice being raised, and the business receives the balance minus fees when the customer settles. It is available to UK businesses that sell to other businesses on credit terms. See our glossary of invoice finance terms for the language funders use.

The problem invoice finance solves

Most B2B businesses are lenders whether they like it or not. You deliver the goods or complete the work today, then wait 30, 60 or sometimes 90 days for the invoice to be paid. In the meantime, wages, suppliers, rent and VAT all want paying on time. The gap between doing the work and being paid for it is where healthy, profitable businesses run out of cash, and it gets wider the faster you grow, because every new order adds cost today against revenue that arrives months later. Invoice finance exists to close that gap. Rather than borrowing against property or trading history, you borrow against the most reliable asset most businesses own: money already owed to you by your customers.

How invoice finance works, step by step

Step one, you trade as normal. You deliver goods or services to a business customer and raise your invoice on your usual credit terms. Step two, the funder advances the money. A copy of the invoice goes to the funder, who advances the agreed percentage, typically 70%–90%, usually within 24 hours. Step three, your customer pays. Depending on the type of facility, they either pay the funder directly or pay into a collections account. Step four, you receive the balance. Once the invoice is settled, the remaining percentage lands with you, minus the funder's charges. As you raise more invoices, the cycle repeats, which means the available funding grows automatically with your sales.

A worked example

Say you invoice £50,000 to a customer on 60 day terms, with an 85% advance rate. Within a day of raising the invoice, £42,500 arrives in your account. Sixty days later your customer pays the full £50,000, and you receive the remaining £7,500 minus the funder's fees. Instead of waiting two months for your money, you had the bulk of it the next day, and payroll never noticed the difference.

The main types of invoice finance

Invoice finance is a family of products rather than a single one, and choosing the right member of the family is most of the battle. Invoice factoring provides funding plus credit control, with the funder collecting payment from your customers, and suits smaller and growing businesses. Invoice discounting provides funding only, leaving you in control of your own collections, and suits established businesses with their own credit control. Confidential invoice finance keeps the funder entirely invisible to your customers. And selective invoice finance lets you fund individual invoices as one-offs, with no ongoing commitment, for businesses whose need is occasional rather than constant.

What does invoice finance cost?

Most facilities charge two things: a service fee, calculated as a percentage of your turnover, and a discount charge on the funds you draw, which works like interest. Selective facilities usually roll everything into a single per-invoice fee instead. Costs vary meaningfully with your turnover, sector, customers and the type of facility, and just as meaningfully between providers quoting for the same business, which is why we compare before recommending. Our invoice finance costs and rates guide itemises every charge you might meet, including the ones that hide in the small print.

Is invoice finance a loan?

Not in the conventional sense, and the difference matters. A loan gives you a fixed lump sum repaid over a fixed term regardless of how trade goes. Invoice finance is a revolving facility secured on your sales ledger, so the funding available tracks your actual trading. Sales double, funding doubles. It also tends to be more accessible than a loan, because the funder's security is your customers' ability to pay rather than your trading history or bricks and mortar. That is why invoice finance is so often the answer for startups, fast-growing businesses and companies whose credit history would make a bank hesitate.

The advantages and disadvantages, honestly

On the plus side: cash within about 24 hours of invoicing, funding that scales automatically with sales, accessibility for new businesses and imperfect credit, no property security required in most cases, and optional extras such as credit control and bad debt protection. On the minus side: it only works for B2B businesses invoicing on credit terms, it costs more than the cheapest secured bank lending, some facilities involve contracts and minimum fees that need reading properly, and a disclosed facility means customers know a funder is involved. Whether the pluses outweigh the minuses depends entirely on your business, which is a genuine "it depends", and exactly the conversation our brokers have with you before anything is recommended. For the full treatment, read our guide on is invoice finance a good idea.

Who uses invoice finance?

Any business selling to other businesses on credit can use it, and tens of thousands of UK companies do. It is particularly embedded in recruitment, where weekly payroll meets slow-paying clients, construction, manufacturing, transport and logistics, wholesale and distribution and business services. If your customers are other businesses and your invoices carry payment terms, your business is probably fundable.