Unpaid invoices can kill an otherwise healthy business. You deliver goods or finish a job on time, but payment terms of 30, 60, or 90 days plus the 'we'll pay you on the next run' delay leave your working capital thin. But your payroll, raw materials, supplier and tax bills won't wait. Business invoice finance closes your cash gap by letting you raise funds against your unpaid customer invoices, giving you quick access to money you have already earned.
How Business Invoice Finance Works
The basic setup is straightforward. When you issue an invoice to a commercial client, a lender advances a large share of its value - usually between 80% and 90% - often within 24 hours. You get immediate cash to run your day-to-day operations.
When your customer pays the invoice in full, the lender releases the remaining percentage to you, minus their agreed fees. This makes it different from a traditional bank loan because the amount you can borrow scales automatically as your sales grow.
Factoring vs Invoice Discounting
Invoice finance comes in two main formats: invoice factoring and invoice discounting. The key differences lie in who collects the debt and whether your clients know you are using a lender.
Invoice Factoring: The funder manages your sales ledger and collects payments directly from your clients. Your customers will know you use a finance provider. This option works well for smaller firms that want to outsource their credit control.
Invoice Discounting: The facility remains confidential. You continue to manage your own payment collection, and your customers send payments into a trust bank account held in your name. This option suits larger, established firms with robust internal finance teams.
Feature | Invoice Factoring | Invoice Discounting |
|---|---|---|
Credit Control | Managed by the lender | Managed in-house by your team |
Confidentiality | Disclosed (customers know) | Confidential (customers do not know) |
Best Suited For | Startups, SMEs without dedicated credit control | Established firms with strong credit processes |
Typical Entry Turnover | From £50,000 per year | Usually £250,000+ per year |
Costs and Fees Breakdown
Understanding the price structure of invoice finance is essential before signing an agreement. Lenders charge for their service using two main costs:
The Service Fee (or Admin Fee): This covers the cost of managing the facility and running credit checks. It is charged as a fixed percentage of your total annual turnover, typically ranging from 0.5% to 3%.
The Discount Rate: This is the interest charged on the actual money you draw down. It works similarly to an overdraft rate and is calculated daily, usually charged between 1.5% and 5% above the Bank of England base rate.
You should also check for extra costs, such as setup fees, audit fees, or minimum monthly charges. Because interest rates and terms vary depending on your sector and customer risk, it pays to compare options across the market.
Fee Element | What It Covers | Typical Cost Range |
|---|---|---|
Service Fee | Account maintenance, ledger management, credit checks | 0.5% to 3.0% of turnover |
Discount Rate | Interest on funds drawn down before client payment | 1.5% to 5.0% over base rate |
Refactoring Fee | Charged on invoices that remain unpaid past agreed terms (e.g., 90 days) | Small percentage penalty per month |
Managing Credit Risk: Recourse vs Non-Recourse
Credit risk is a critical point to consider when choosing a facility. Lenders offer two choices for dealing with unpaid bills:
Recourse Invoice Finance: This is the most common setup. If your customer fails to pay their bill due to insolvency or cash problems, you must buy back the invoice or repay the advance to the lender. The ultimate credit risk remains with your business.
Non-Recourse Invoice Finance: This option includes bad debt protection. If a client becomes insolvent and cannot pay an approved invoice, the lender absorbs the loss. Because the funder carries the risk, non-recourse facilities carry higher service fees and stricter limits on which customers you can fund.
Keep in mind that non-recourse cover only applies if a client goes bust or cannot pay for financial reasons. It will not cover you if a customer holds back payment due to a contract dispute or poor service.
Is Your Business Eligible?
Invoice finance is widely available across sectors like recruitment, manufacturing, transport, wholesale, and construction. However, lenders look for specific criteria before offering terms:
B2B Sales Only: You must sell goods or services to other businesses on credit terms. B2C sales (selling directly to consumers) do not qualify.
Verifiable Debt: Your invoices must represent completed work or delivered goods with clear proof of delivery.
Strong Customer Base: Lenders assess the creditworthiness of your clients rather than just your balance sheet. Having a spread of reliable, well-established corporate customers makes approval easier.
Minimum Turnover: While some selective invoice finance providers cover single bills, most whole-ledger facilities prefer an annual turnover of at least £50,000.
Finding the Right Invoice Finance Facility
Every lender has different credit criteria, industry preferences, and fee structures. Going straight to a single high street bank often leads to restrictive terms or a flat refusal if your turnover or trade history does not fit their standard box.
At SME Money, we connect UK businesses with specialist brokers who search over 70 lenders to find the right funding setup for your specific trade. Working with an independent broker helps you compare costs fairly and secure competitive rates without bias.
Invoice finance affects your cash flow timing, bookkeeping, and how you report sales for tax. It is always wise to speak to a qualified accountant to make sure the accounting setup works smoothly alongside your standard VAT and tax reporting.
