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Invoice finance provides a way of accessing some of that money sooner.
Rather than waiting for customers to pay, businesses can use outstanding invoices to access working capital, helping bridge the gap between completing work and receiving payment.
In this guide, we explain how invoice finance works, the difference between factoring and invoice discounting, what it costs, which businesses can use it and when it could be a suitable alternative to traditional business borrowing.
Invoice finance is a form of business funding that allows companies to access cash tied up in unpaid customer invoices.
Instead of waiting until the invoice due date, an invoice finance provider can advance an agreed percentage of eligible invoices shortly after they are raised.
The British Business Bank describes invoice finance as a way for businesses to use unpaid invoices as security for funding, with providers commonly advancing up to around 80–90% of an eligible invoice’s value.
Once the customer pays, the remaining balance is made available to the business, less the lender’s charges.
This creates a revolving source of working capital linked to the value of the company’s sales ledger.
Although individual facilities vary between providers, the basic process is relatively straightforward.
1. You Supply Your Customer
Your business provides goods or services to another business in the normal way.
2. You Raise an Invoice
You issue an invoice to your customer, usually with agreed payment terms such as 30, 60 or 90 days.
3. The Invoice Is Submitted to the Finance Provider
The eligible invoice is included within your invoice finance facility.
4. You Receive an Advance
The finance provider releases an agreed percentage of the invoice value, potentially up to around 80–90% depending on the facility.
Instead of waiting weeks or months for payment, the business can therefore access a significant proportion of the money much sooner.
5. Your Customer Pays the Invoice
When the customer settles the invoice, the payment is processed in accordance with the terms of the invoice finance facility.
6. The Remaining Balance Is Released
The lender releases the remaining balance after deducting the relevant finance charges and fees.As new invoices are raised, further funding can become available.This is what makes invoice finance particularly useful for growing businesses: the facility can potentially grow alongside turnover.
Imagine your business raises a £50,000 invoice with 60-day payment terms. Rather than waiting two months for the full £50,000, your invoice finance provider agrees to advance 85%.
Your business could therefore access £42,500 shortly after raising the eligible invoice.
When your customer subsequently pays the £50,000 invoice, the remaining balance is released to you, less the provider’s agreed fees and charges. The exact advance percentage, fees and availability will depend on the provider, customer and facility.
The two main forms of invoice finance are factoring and invoice discounting.
Although both release cash against outstanding invoices, there is an important difference in how the sales ledger and customer collections are managed.
Invoice Factoring
With factoring, the finance provider will normally take a more active role in managing the sales ledger and collecting outstanding invoices from customers.
Your customers will therefore generally be aware that a factoring arrangement is in place.
Factoring can be particularly useful for smaller or growing businesses that don’t have an established internal credit control function.
As well as providing working capital, outsourcing some of the collection process can reduce the administrative burden associated with chasing outstanding invoices.
Invoice Discounting
Invoice discounting allows a business to retain greater control over its sales ledger and customer relationships.
The business normally continues to collect payments itself while using outstanding invoices to access funding.
Many invoice discounting facilities can also operate confidentially, meaning customers may not be aware that the business is using an invoice finance provider.
Invoice discounting has traditionally been more commonly used by established businesses with stronger internal credit control systems, although facilities are increasingly available to smaller businesses as well.
| Factoring | Invoice Discounting | |
|---|---|---|
| Access funding against invoices | Yes | Yes |
| Business retains credit control | Usually no | Usually yes |
| Provider can collect customer payments | Yes | Usually no |
| Can potentially be confidential | Usually no | Yes |
| Suitable for smaller businesses | Often | Increasingly |
| Internal credit control required | Less important | Usually important |
The most appropriate solution depends on the size of your business, your sales ledger, internal resources and how much control you want to retain over customer collections.
One of the main advantages of invoice finance is flexibility.
The money released from outstanding invoices can potentially be used for a wide range of normal business requirements, including:
Rather than borrowing a fixed amount based solely on historical performance, the amount available can increase as the value of eligible invoices grows.
A profitable business can still experience cash flow pressure. Consider a company that wins a substantial new contract. It may need to purchase materials, pay employees, arrange transport and cover other operating costs before receiving payment from its customer.
If that customer operates on 60-day payment terms, the business effectively has to finance those costs for two months. If several customers operate on similar terms, a significant amount of working capital can become locked within the sales ledger.
Invoice finance can shorten that cash flow cycle by allowing the business to access part of the money it is already owed. This can be particularly valuable for businesses experiencing rapid growth.
Invoice finance is commonly used by businesses that sell products or services to other businesses on credit terms.
This can include companies operating in:
Recruitment
Recruitment agencies frequently have to pay weekly or monthly wages before their commercial customers settle invoices. Invoice finance can help bridge that gap.
Manufacturing
Manufacturers may incur substantial costs purchasing raw materials and producing goods before customers make payment.
Transport and Logistics
Fuel, wages, vehicle costs and other expenses need to be paid regardless of whether customers have settled their invoices.
Construction
Contractors and suppliers can face extended payment cycles while continuing to fund labour, materials and equipment.
Wholesale and Distribution
Stock often has to be purchased before products are supplied and invoices subsequently paid.
Professional and Business Services
Businesses providing services to larger organisations may have relatively few physical assets but a substantial sales ledger that can potentially support an invoice finance facility.
No.
This is an important misconception. Invoice finance isn’t simply a solution for struggling businesses. It can also be used strategically by profitable and growing companies that want to accelerate access to working capital.
For example, a company may be offered a significant new contract but need to increase staffing, stock or production before the additional revenue begins arriving.
Invoice finance can potentially provide the working capital required to support that growth without waiting for existing customers to pay.
Potentially, and this is one of its biggest attractions. A traditional business loan generally provides a fixed amount of money. Invoice finance works differently because availability is linked to eligible outstanding invoices. If your business grows and raises more invoices, the amount of funding potentially available through the facility can also increase.
This makes invoice finance particularly well suited to businesses experiencing rapid growth.
The amount available depends primarily on the value and quality of your eligible sales ledger.
Lenders will consider factors including:
A business with a diverse sales ledger containing established, creditworthy customers may present a very different funding proposition from one where the majority of turnover depends on a single customer.
At Liquid Corporate Finance, invoice finance facilities can potentially range from relatively modest working capital requirements through to facilities worth several million pounds, subject to lender criteria.
Invoice finance costs vary considerably depending on the provider and structure of the facility.
Charges can include a service fee for operating the facility and a discount charge, which works in a similar way to interest and is generally calculated against the money being utilised.
There may also be additional charges depending on the structure of the facility and services provided.
For this reason, comparing invoice finance facilities purely on one headline rate can be misleading.
Businesses should consider the overall facility, including:
A facility offering a slightly lower headline rate isn’t necessarily better if it provides less funding availability or has a more restrictive structure.
Traditional factoring and invoice discounting facilities generally operate across a company’s sales ledger.
However, other options are available.
Selective invoice finance can allow businesses to choose particular customers or invoices against which they want to raise funding. Similarly, spot invoice finance may allow individual invoices to be financed rather than establishing a traditional whole-turnover facility.
These solutions can be useful for businesses that only occasionally require additional working capital. However, convenience and flexibility need to be weighed against the overall cost compared with a longer-term invoice finance facility.
It depends on the type of facility.
With factoring, customers will normally know because the factor is typically involved in collecting outstanding invoices.
With confidential invoice discounting, the arrangement can potentially remain undisclosed and your business continues managing customer collections.
For businesses concerned about maintaining complete control over customer relationships, this can be an important consideration when choosing a facility.
Invoice finance lenders assess applications differently from traditional business loan providers because the quality of the sales ledger is central to the facility.
They are likely to consider:
Your Customers
The creditworthiness of the businesses that owe you money can be extremely important.
Your Sales Ledger
The lender will assess the size, quality and spread of outstanding invoices.
Customer Concentration
If a very high percentage of turnover comes from one customer, this may influence the amount the lender is prepared to advance.
Payment Terms
Businesses invoicing customers on recognised commercial payment terms may be easier to fund than those with unusually long or complicated arrangements.
Credit Notes and Disputes
A high level of invoice disputes, credit notes or retrospective adjustments can make a sales ledger more difficult to finance.
Your Business
The lender will still consider your company’s trading history, financial performance, management and overall circumstances.
Requirements vary between lenders, but businesses may be asked to provide:
Having accurate and up-to-date financial information can make the application process considerably easier.
Invoice finance can provide several benefits.
Improved Cash Flow
Access money from eligible invoices without waiting for customers to reach their payment date.
Funding That Can Grow With Turnover
As eligible sales increase, potential funding availability can increase as well.
Less Reliance on Fixed Assets
The facility is primarily supported by the sales ledger rather than requiring the business to own substantial machinery or property.
Supports Growth
Additional working capital can help businesses take on larger contracts and customers.
Flexible Use of Funds
Money released can generally be used for normal business purposes.
Potential Credit Control Support
Factoring can provide additional support with collecting customer invoices.
Invoice finance isn’t right for every business.
Things to consider include:
The quality of the facility and provider therefore matters just as much as the availability of funding.
Both can provide working capital, but they operate very differently.
A business loan provides an agreed lump sum which is repaid over a set period.
Invoice finance provides a revolving facility linked to eligible unpaid invoices.
For a business with a growing sales ledger, invoice finance may therefore provide greater scalability.
However, a business loan may be more appropriate where funding is required for a specific project and the company doesn’t have a suitable B2B sales ledger.
Neither is automatically better. The right option depends on what the business is trying to achieve.
An overdraft provides access to additional funds through a business bank account up to an agreed limit.
Invoice finance is directly linked to eligible invoices. This can mean that invoice finance availability has the potential to increase as a company’s sales ledger grows, whereas an overdraft normally has a predetermined facility limit.
Again, the right solution depends on the business’s requirements.
Yes, potentially.
A business might use invoice finance to support day-to-day working capital while separately using asset finance to purchase machinery or commercial vehicles.
For example:
Invoice Finance → working capital and cash flow
Asset Finance → machinery, equipment and vehicles
Business Loan → broader investment or expansion
Refinance → releasing equity from existing assets
Structuring finance in this way can prevent businesses from using short-term working capital for long-term capital expenditure.
Invoice Finance Through the Growth Guarantee Scheme
Eligible businesses may also be able to access certain invoice finance facilities through the Growth Guarantee Scheme, subject to the current scheme rules and the criteria of participating accredited lenders.
This can provide another route to funding for qualifying UK SMEs.
Invoice finance can also be used to restructure an existing facility rather than simply establish one for the first time.
In one Liquid Corporate Finance case, an established electronics manufacturer wanted to improve the terms available from its existing invoice finance provider while also addressing expensive borrowing accumulated during the pandemic.
We secured a £750,000 invoice finance facility, providing £250,000 more availability than the company’s existing provider, while also reducing the overall fees and tariff of charges.
The wider transaction was structured to improve working capital rather than simply adding more debt to the business.
Read the full Invoice Finance case study.
There are numerous invoice finance providers operating in the UK, ranging from major banks to specialist independent funders.
The cheapest headline rate doesn’t necessarily represent the best facility.
A broker can assess your requirements and compare factors such as:
At Liquid Corporate Finance, we work with a wide panel of lenders to help UK businesses identify invoice finance facilities suited to their individual circumstances.
As an independent finance broker, our role is to understand the requirement, identify suitable funding options and structure a facility that works for the business.
How does invoice finance work?
Invoice finance allows a business to access money against eligible unpaid customer invoices. A finance provider advances an agreed percentage of the invoice value, with the remaining balance becoming available after the customer pays, less applicable fees and charges.
How much of an invoice can I receive upfront?
Providers can potentially advance up to around 80–90% of eligible invoice values, although the exact percentage depends on the lender, customer and facility.
Is invoice finance suitable for small businesses?
Potentially. Invoice finance is available to businesses of different sizes, although eligibility depends on factors such as turnover, sales ledger quality and customer profile.
What’s the difference between factoring and invoice discounting?
Factoring normally includes credit control and customer collection services provided by the funder. With invoice discounting, the business generally retains responsibility for managing its own sales ledger.
Will customers know I’m using invoice finance?
With factoring they normally will. Invoice discounting can potentially operate confidentially, depending on the facility.
Can I choose which invoices I finance?
Some selective and spot invoice finance facilities allow businesses to finance specific invoices or customer accounts. Traditional facilities generally operate across a wider proportion of the sales ledger.
Can invoice finance help a growing business?
Yes. Because funding availability can increase as eligible invoiced sales grow, invoice finance can be particularly useful for businesses experiencing rapid growth.
Can I switch invoice finance providers?
Yes, subject to the terms and notice requirements of your existing facility. Moving provider can sometimes increase funding availability, reduce costs or provide a facility better suited to the business.
If long customer payment terms are restricting your cash flow, invoice finance could provide the working capital your business needs to keep moving forward.
Whether you’re considering invoice finance for the first time or want to review an existing facility, Liquid Corporate Finance can compare options from across our lender panel and help identify a solution tailored to your business.
Speak to us today for a free, no-obligation discussion about your invoice finance requirements.
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