Late payment is one of the most persistent cash-flow problems for UK businesses. When customers take 60 or 90 days to pay, a profitable company can still run short of cash to pay staff, suppliers and HMRC. Invoice finance lets a business borrow against its unpaid invoices instead of waiting for customers to pay.
This guide explains the main types of invoice finance, how they are priced, the contract terms that catch businesses out and when another form of finance may be the better choice.
Key takeaways
- Invoice finance releases cash tied up in unpaid B2B invoices. A provider advances a percentage of the invoice value and you receive the balance, minus fees, when the customer pays.
- Factoring: the provider runs your sales ledger and collects payments, and customers know. Invoice discounting: you keep control of collections, usually confidentially.
- Typical costs (NI Business Info): a discount charge of about 1.5% to 3% over base rate, plus a service fee of 0.75% to 2.5% of turnover for factoring, or 0.2% to 0.5% for invoice discounting.
- Recourse vs non-recourse: with recourse, you carry bad-debt risk; non-recourse adds credit protection, typically costing 0.5% to 2% of turnover.
- Check the contract: notice periods, minimum fees, concentration limits, personal guarantees and termination costs often matter more than the headline rate.
In this guide
How invoice finance works
- You deliver goods or services and issue an invoice to a business customer on credit terms.
- You submit the invoice, or your whole sales ledger, to the finance provider.
- The provider advances a percentage of the invoice value, commonly up to 80–90%, often within a day or two.
- Your customer pays the invoice, either into a trust account controlled by the provider or directly to the provider.
- The provider releases the remaining balance to you, minus its charges.
Because the lending is secured on your invoices, the amount available grows as your sales grow. This is the main advantage over a fixed overdraft or loan.
Types compared
| Factoring | Invoice discounting | Selective (single-invoice) finance | |
|---|---|---|---|
| Who collects payment | The provider | You | Usually the provider |
| Do customers know? | Yes (disclosed) | Usually not (confidential) | Often yes |
| Scope | Whole sales ledger | Whole sales ledger | Invoices you choose |
| Typical user | Smaller or growing businesses without a credit-control team | Established businesses with robust credit control and stronger financials | Businesses with occasional cash-flow gaps or a few large invoices |
| Relative cost | Higher service fees | Lower service fees | Higher per invoice, but no long-term commitment |
Some lenders also offer asset-based lending, which combines invoice finance with borrowing against stock, plant and machinery or property, for larger businesses with more complex funding needs.
What it costs
Invoice finance pricing usually has several parts. The ranges below are indicative figures published by NI Business Info, a government business-support service; actual pricing depends on your turnover, customers, sector and credit history.
| Charge | How it works | Indicative range |
|---|---|---|
| Discount charge | Interest on the money you have drawn, calculated daily and usually charged monthly | About 1.5% to 3% over base rate |
| Service fee: factoring | Covers sales-ledger management and collections | 0.75% to 2.5% of turnover |
| Service fee: invoice discounting | Lower, because you collect your own debts | 0.2% to 0.5% of turnover |
| Credit protection | Insurance against customer insolvency in non-recourse arrangements | 0.5% to 2% of turnover |
| Other fees | Set-up, audit, additional services, early termination | Varies by provider; ask for a full schedule |
Service fees are usually charged on total turnover put through the facility, not on the amount you borrow. If you only need to draw a small part of your available funding, the effective cost per pound borrowed can be high.
A worked example
The following is an illustration only, using round numbers within the ranges above.
A UK engineering services company has annual turnover of £1.2 million, all on 60-day terms, and uses confidential invoice discounting:
- Average outstanding invoices: about £200,000.
- Advance rate: 85%, so up to £170,000 available.
- Average amount actually drawn: £150,000.
- Service fee at 0.3% of turnover: £1.2m × 0.3% = £3,600 a year.
- Discount charge: if base rate plus margin came to 7% a year, interest on an average £150,000 would be £10,500 a year.
- Total: about £14,100 a year, before any set-up, audit or credit-protection fees.
The same company on full factoring with a 1.5% service fee would pay £18,000 a year in service fees alone, but would no longer need to run credit control in-house. The right comparison is against the cost of the alternatives, including management time and lost opportunities from being short of cash.
Contract terms to check
| Term | What to look for |
|---|---|
| Minimum term and notice period | Many agreements require three months’ notice, and some up to a year. Check for fixed minimum terms. |
| Minimum fees | A minimum annual service charge applies even if your turnover falls. |
| Termination fees | Can be significant if you leave early or switch provider. |
| Concentration limits | A cap on how much of the ledger can relate to a single customer. Important if one customer dominates your sales. |
| Disapproved debts | Invoices the provider will not fund, such as overseas customers, connected companies or old debts. |
| Recourse period | How long after the due date unpaid invoices are handed back to you, reducing your available funding. |
| Security and guarantees | Providers often take a debenture over the business and may ask directors for personal guarantees or warranties. |
| Audits | Periodic reviews of your ledger; check who pays for them. |
Invoice finance for businesses is generally not a regulated activity under Financial Conduct Authority rules, so protections can differ from consumer credit. Read the full agreement, ask for a complete fee schedule, and consider independent advice from an accountant or a finance broker who discloses how they are paid.
Who it suits, and who it does not
Often a good fit:
- B2B businesses with creditworthy customers and payment terms of 30 to 90 days;
- growing companies whose working capital needs rise with sales;
- seasonal businesses, or those with a few large contracts;
- businesses with limited property or other assets to secure a loan.
Often a poor fit:
- businesses selling mainly to consumers, since there are no B2B invoices to finance;
- businesses with staged payments, retentions or frequent disputes, common in construction, which many providers treat cautiously;
- businesses that only need a small, occasional top-up, where fees on total turnover may be disproportionate.
Alternatives
- Business overdraft or revolving credit facility: flexible, but usually needs a strong banking relationship and may need security.
- Term loans, including government-backed schemes delivered through accredited lenders: suited to one-off investment rather than ongoing working capital.
- Trade finance or supply chain finance: some large buyers offer early payment programmes to their suppliers.
- Improving credit control: clear terms, prompt invoicing and structured e-invoices can shorten payment times. As e-invoicing becomes mandatory across Europe and, from 2029, in the UK, invoices that flow straight into customers’ systems are often paid faster. See our guide to Peppol e-invoicing.
Frequently asked questions
Will my customers know I use invoice finance?
With factoring, yes: the provider usually collects payments in its own name. With confidential invoice discounting, customers usually pay into an account in your name that the provider controls, and do not need to be told.
How quickly can I get funds?
Once a facility is set up, advances are often available within a day or two of submitting invoices. Setting up the facility itself can take from days to a few weeks, depending on the provider’s checks.
Can start-ups use invoice finance?
Some providers work with young businesses, especially for factoring or selective finance, provided the customers are creditworthy. Expect lower advance rates and closer monitoring.
What happens if a customer does not pay?
Under a recourse facility, the unpaid invoice is returned to you and you must repay the advance. Under non-recourse, credit protection covers customer insolvency up to agreed limits, but usually not commercial disputes.
Is invoice finance the same as a loan?
It is a form of secured borrowing, but the amount available moves with your sales ledger instead of being fixed, and it is repaid from customer payments rather than in fixed instalments.
Conclusion
Invoice finance can turn a growing sales ledger into usable cash, but it is not cheap or simple. The best results come from matching the product to how your business actually collects cash, comparing total annual cost rather than headline rates, and reading the contract carefully before signing.
Sources
- NI Business Info, Cost of factoring and invoice discounting
- British Business Bank, Finance Hub guidance on invoice finance (british-business-bank.co.uk)
- UK Finance, the trade association representing invoice finance and asset-based lenders (ukfinance.org.uk)
This article is general information and not financial advice. Costs and terms vary by provider and change over time. Mukesh LPM Insights is not authorised by the Financial Conduct Authority and does not arrange finance. Speak to a qualified adviser before entering a finance agreement. Last checked: 7 November 2026. See our Disclaimer.