What is invoice finance?

A business that sells to other businesses can be profitable, growing and still permanently short of cash, because its money sits in customers’ accounts for 30, 60 or 90 days. Invoice finance unlocks that money early. This entry explains how the mechanics work, how the two main forms differ and what financiers look for.

How does invoice finance work, step by step?

1. You deliver and invoice your business customer as usual.
2. The invoice is uploaded or assigned to the financier, often automatically through your accounting software.
3. The financier advances a percentage of the invoice’s value, usually within a day or two. The exact percentage depends on the financier, your industry and your customers.
4. Your customer pays on their normal terms, either to you or to an account the financier controls.
5. The financier releases the balance — the rest of the invoice less its fees and charges.

Because the facility is tied to your sales ledger, the more you invoice, the more you can draw. That makes invoice finance unusually well suited to growing businesses, whose cash gap widens as sales rise.

What’s the difference between factoring and discounting?

	Factoring	Invoice discounting
Who collects from customers	The financier	You
Customers aware?	Usually	Often confidential
Credit control support	Included	You manage it
Typical user	Smaller or newer businesses	Larger businesses with good systems
Scope	Often whole ledger	Whole ledger or selected invoices

Some providers also offer selective or spot invoice finance, where you fund individual invoices rather than your whole ledger. Our factoring vs discounting comparison goes through the trade-offs.

What do invoice financiers look at?

The financier is effectively lending against your customers’ promise to pay, so it looks at both sides:

• Your customers. Their size, payment history and creditworthiness. Government and large corporate customers are usually viewed favourably.
• Concentration. If one customer makes up most of your ledger, the financier may cap how much it will advance against that customer.
• Invoice quality. Clear delivery or completion, no disputes, no offsets or contra arrangements, and no progress claims that could be contested.
• Your aged receivables. Invoices well past due are often excluded.
• Your business. Trading history, existing security (such as a general security agreement held by another lender) and any tax debt.

Financiers typically register their interest on the PPSR, and an existing GSA held by your bank may need a priority arrangement. If you’re unsure whether your ledger qualifies, you can ask a specialist to take a look.

What does invoice finance cost?

Costs are usually a mix of:

• a service or administration fee, often linked to the volume of invoices;
• a discount or interest charge on the funds advanced, for as long as they’re outstanding;
• establishment and sometimes minimum monthly fees;
• extra fees for credit insurance or non-recourse cover.

Because you pay only while invoices are outstanding, faster-paying customers mean lower costs. Compare facilities on your realistic monthly invoicing and your customers’ actual payment times, not on the headline.

When is invoice finance not the right fit?

• You sell mostly to consumers — invoice finance generally needs business or government debtors.
• Your invoices are heavily disputed, progress-based or subject to retention.
• Your ledger is small or irregular, making minimum fees disproportionate.
• The need is one-off rather than ongoing; a short working capital loan may be simpler.

How does invoice finance interact with your bank?

If your bank already holds a general security agreement over your business, it will generally have a registered interest in your receivables. An invoice financier will usually need the bank to agree to release or subordinate its interest in the invoices being funded. This is routine but takes time, so raise it early.

Some businesses run invoice finance alongside an overdraft or term loan from the same bank; others move their working capital entirely to the invoice financier. The right answer depends on your ledger size, the bank’s appetite and the total cost of each arrangement.

Terms used in this entry

• Advance rate — the share of an eligible invoice’s value the financier pays you up front. Glossary →
• Recourse — your obligation to repay the financier if a customer doesn’t pay within the agreed period. Glossary →
• Concentration limit — a cap on how much of the facility can depend on a single customer. Glossary →
• Ledger — your full list of unpaid customer invoices, often read from your accounting software. Glossary →

Every term is defined in the business finance glossary, with links back to the full entries.

Worked example (illustrative)

Illustrative only. A labour-hire firm pays its workers weekly but its construction clients pay on 45-day terms. As it wins more contracts, the gap between wages out and payments in grows every month.

An invoice discounting facility advances cash against each week’s invoices within a day of issue, so wages are covered by the work itself. As the firm adds clients, the facility grows with the ledger without a new application. The owner keeps collecting from clients directly, so relationships are unchanged.

Waiting on invoices while bills fall due?

If your customers are businesses and your cash is tied up in unpaid invoices, invoice finance may unlock it — or a specialist may find a line of credit fits better. It takes about 60 seconds to enquire, there’s no credit check when you first enquire, and your details go to one team rather than a list of lenders. A real person reviews your ledger and calls you. Tell us your monthly invoicing and typical customer payment times as accurately as possible so we can match you first time.

See if you qualify →