Invoice Finance: The Complete Guide for UK Businesses

Invoice finance is a revolving facility that lets a business borrow against its unpaid sales invoices, so cash arrives when the invoice is raised rather than when the customer pays. It suits UK businesses that sell to other businesses on credit terms, typically 30 to 90 days, and that need working capital to grow faster than their customers settle.

Key facts

• Advance rate: up to 90% of approved invoice value, and 95% to 100% in some sectors such as recruitment and retail.
• Facility size: Growth Business Finance (GBF) arranges facilities from £200k. Larger requirements often move into asset based lending from £2m to £100m.
• Pricing: a discount charge on funds drawn, usually a margin over Bank Rate, plus a service fee. Everything is priced deal by deal.
• Bank Rate: currently 3.75%, set by the Bank of England.
• Two main forms: factoring (the lender collects from your customers) and invoice discounting (you collect, usually confidentially).
• Security: your sales ledger, normally backed by a debenture and often a director guarantee.
• Who it is not for: businesses that sell mainly to consumers or take payment at the point of sale.

How invoice finance works

The mechanics are the same whichever provider you use:

1. You deliver goods or services and raise an invoice to a business customer.
2. The invoice is notified to the lender, either individually or through a regular ledger upload.
3. The lender advances an agreed percentage of the invoice value, usually within a day of notification once the facility is live.
4. Your customer pays in line with their normal terms, into an account controlled by the lender.
5. The lender releases the balance to you, less its charges.

Because the facility is linked to your sales ledger, the funding available rises as you invoice more. That is the main difference from a fixed business loan, which gives you a lump sum and does not grow with turnover.

Factoring, invoice discounting and selective finance

There are three main forms, and the right one depends on how strong your credit control is and how sensitive your customer relationships are:

• Factoring: the lender runs your sales ledger and chases payment. Customers know a finance provider is involved. It suits younger businesses without a dedicated credit controller.
• Invoice discounting: you keep control of collections and the arrangement is usually confidential. It suits established businesses with reliable credit control and clean ledger reporting.
• Selective (spot) invoice finance: you fund individual invoices or customers rather than the whole ledger. It suits occasional large invoices rather than an ongoing need.

We compare factoring and discounting in detail in our invoice discounting vs factoring guide, so this guide focuses on the wider decision.

How it fits with asset based lending

Invoice finance is a related facility to asset based lending (ABL), not the same thing. An ABL facility uses receivables as one of up to four asset classes in a single revolving line, alongside stock (up to 90% of net orderly liquidation value), plant and machinery (up to 85% of NOLV) and real estate (up to 80%). If your business holds significant stock or equipment as well as debtors, an ABL structure can raise considerably more than invoice finance alone. See our asset based lending page for how that works.

Who invoice finance suits

Invoice finance works best where a business invoices creditworthy commercial customers on agreed terms, and where the invoice represents completed work or delivered goods. Sectors where it is most common include:

• Recruitment and staffing: weekly payroll against monthly client payments makes the cash gap acute. Some lenders advance 95% to 100% in this sector. See our recruitment ABL page.
• Professional services: consultancies, IT services and agencies that bill monthly in arrears. See professional services.
• Transport and logistics: hauliers paying fuel and drivers weekly while customers pay on 60 days or more. See transport and logistics.
• Manufacturing and wholesale: businesses that combine invoice finance with stock funding. See manufacturing ABL and wholesale distribution ABL.
• Construction: possible, but contracts with stage payments, applications for payment and retentions need a specialist lender. See construction.

It is usually a poor fit for consumer-facing businesses, where card payments or revenue-based stock finance are more relevant.

Costs and terms

Invoice finance is priced in two layers, and both are agreed deal by deal:

• Discount charge: interest on the money you actually draw, normally quoted as a margin over Bank Rate. When Bank Rate moves, your cost moves with it.
• Service fee: a charge for running the facility, often expressed as a percentage of invoices funded or as a fixed monthly fee. Factoring carries a higher service fee than discounting because the lender does the collection work.

Other terms to check include minimum annual fees, arrangement fees, audit fees, notice periods, termination fees and any minimum term. A cheap discount margin can be outweighed by a high minimum fee if your usage is lower than expected, so always model the total annual cost at realistic drawing levels.

For context, larger receivables-led structures arranged as ABL are priced from 2% over Bank Rate on 3 to 5 year terms. You can test the effect of different margins on your monthly cost with our financial calculator.

Eligibility and what lenders look at

Invoice finance lenders underwrite your debtor book as much as your business. The main points they assess are:

• Debtor quality: the credit standing of your customers. Large, creditworthy commercial buyers support higher advance rates.
• Concentration: how much of your ledger sits with one or two customers. Most lenders cap exposure to any single debtor, and heavy concentration reduces availability.
• Dilution: credit notes, disputes, discounts and returns that reduce what customers actually pay.
• Contractual position: whether invoices are for completed work, and whether contracts contain set-off, retention or stage-payment clauses that could block collection.
• Ageing: how long invoices take to be paid. Invoices beyond an agreed age are usually excluded from funding.
• Financial position: recent accounts, management information and the directors' track record.

Businesses with complex contracts or concentrated ledgers are not ruled out, but they need a lender whose appetite matches the risk.

Documents you will need

Having the following ready will shorten the process considerably:

• Last two years of filed accounts and current year management accounts
• Aged debtor and aged creditor reports, ideally for the last few month-ends
• A list of your top customers with their payment terms
• Sample invoices and the terms and conditions you trade on
• Copies of any key customer contracts
• Recent business bank statements
• Details of any existing borrowing and security

Invoice finance vs the alternatives

Common mistakes

• Choosing on headline rate alone. The minimum fee, service fee and termination costs often matter more than the margin.
• Funding the whole ledger when you only need occasional help. Selective finance may be cheaper for irregular needs.
• Ignoring concentration. If one customer is a large share of your sales, availability may be lower than you expect.
• Not reading the termination clause. Long notice periods and exit fees can make it expensive to move to a better facility later.
• Treating invoice finance as a fix for losses. It solves timing, not profitability. Lenders will look closely at trading performance.
• Waiting until cash is critical. A facility arranged under pressure is rarely the best one available.

How a broker and debt adviser like GBF helps

Growth Business Finance is a commercial finance broker and debt adviser, not a lender. Our process is straightforward:

1. Understand the need. We review your sales ledger, customer base, trading position and how much headroom you actually require.
2. Choose the structure. We assess whether invoice finance, ABL, an RCF or a combination fits best.
3. Prepare the case. We present your business and debtor book to lenders in the way they underwrite it.
4. Run a competitive process. We approach lenders whose appetite matches your sector and ledger, then compare offers on total cost and terms, not just margin.
5. See it through. We manage due diligence, audits and documentation through to drawdown.

If you already have a facility, our facility health check reviews whether your current terms still fit your business.

FAQs

What is the difference between invoice finance and factoring?

Invoice finance is the umbrella term. Factoring is one type of invoice finance, where the lender also manages your sales ledger and collects payment from customers. Invoice discounting is the other main type, where you keep control of collections.

How much can I borrow with invoice finance?

Lenders typically advance up to 90% of approved invoice value, and 95% to 100% in some sectors such as recruitment and retail. The total facility depends on the size and quality of your sales ledger. GBF arranges facilities from £200k.

Will my customers know I am using invoice finance?

With factoring, yes, because the lender collects payment. With confidential invoice discounting, customers usually continue to pay you as normal and are not told a lender is involved.

How much does invoice finance cost?

Cost is made up of a discount charge on funds drawn, usually a margin over Bank Rate, and a service fee for running the facility. Both are priced deal by deal based on your turnover, customers and sector.

Can I get invoice finance if my business is loss-making?

It is possible, because the lender relies heavily on the quality of your debtors, but lenders will still review your trading position and outlook. A clear explanation of the losses and the plan to return to profit helps.

Is invoice finance available through the Growth Guarantee Scheme?

The British Business Bank's Growth Guarantee Scheme can support invoice finance through accredited lenders, with a 70% government guarantee and up to £2m per group. Eligibility and availability depend on the lender.

Should I choose invoice finance or asset based lending?

If your main asset is your debtor book, invoice finance may be enough. If you also hold significant stock, plant or property and need £2m or more, ABL can usually raise more in a single facility.

Find out what you could raise

If unpaid invoices are holding back your growth, use check what you could raise for an indication of the facility your business could support, or call us on 020 3432 2341 to talk it through.

Growth Business Finance Ltd (company 17136039) is an Appointed Representative of Swoop Finance Limited (FRN 936513). Our FCA reference is 1034979. We are a commercial finance broker and debt adviser, not a lender. Finance is subject to status and lender approval.

Tom Renshaw

Founder and Managing Director, Growth Business Finance

Tom arranges business loans, asset based lending and property finance for UK SMEs and mid-market companies. More about GBF