What Is Invoice Finance?
Invoice Finance

For a business that invoices on 30 or 60-day terms, a lot of cash sits in unpaid invoices at any moment. Invoice finance unlocks it early. A finance provider advances a share of the value of your invoices, typically within days, and pays you the rest, less its charges, when your customers settle. It is not a loan in the usual sense, because it is tied directly to specific invoices, but it is a cost, and it only makes sense when the early cash is worth more to your business than the fee you pay for it.

How invoice finance works

1. You invoice your customer as usual, on your normal terms.
2. You submit the invoice to the finance provider.
3. The provider advances an agreed percentage of its value.
4. Your customer pays, either to you or to the provider, depending on the arrangement.
5. The provider pays you the balance, less its fees and discount charge.

Factoring and invoice discounting compared

The entry on invoice factoring goes into factoring in more detail.

Recourse and non-recourse

In a recourse arrangement, if a customer does not pay, the risk comes back to you: the provider recovers the advance from you. In a non-recourse arrangement, the provider takes some or all of the risk of the customer not paying, usually for a higher fee and often only for approved customers up to set limits. Read what "non-recourse" covers in any offer: it rarely covers disputes about the quality of your work.

What it costs

Providers typically charge in two ways: a service or administration fee, often a percentage of the invoices financed or of turnover, and a discount charge, which works like interest on the money advanced for as long as it is outstanding. There may also be set-up fees, minimum terms and charges for ending the facility early. Compare offers on the total cost for a realistic year of your invoices, not the headline rate, and ask each provider to show the calculation.

When invoice finance makes sense

• Growing businesses whose customers pay on long terms, where each new order ties up more cash.
• Businesses with lumpy cash flow, such as those with large, infrequent invoices.
• Suppliers to large customers who insist on 60-day terms.
• Seasonal businesses that need cash before a busy period.

It makes less sense for a business with a few small invoices, for invoices to households, which providers usually will not finance, or where the cost would wipe out the margin on the work.

Alternatives to try first

Before paying for finance, look at the cheaper levers: shorter payment terms, deposits and stage payments, invoicing the day work finishes, and chasing the day after the due date. For business customers who pay late, statutory interest and fixed compensation shift some of the cost of waiting back to them; the late payment interest calculator shows how much. The guides on invoice payment terms and how to chase an unpaid invoice cover each lever.

Contracts that ban assignment

Some customers' contracts used to forbid suppliers from assigning their invoices, which blocked invoice finance. The Business Contract Terms (Assignment of Receivables) Regulations 2018 changed that for most small and medium-sized suppliers: for contracts entered into on or after 31 December 2018, a term that prohibits or restricts the assignment of a receivable generally has no effect. There are exceptions, including where the supplier is a large enterprise or a special purpose vehicle, and certain kinds of contract are excluded, so check your position before relying on it.

Invoice finance and your accounts

How invoice finance appears in your accounts depends on the arrangement, and in particular on whether you keep the risk of customers not paying. Under many recourse arrangements, the invoices remain your receivables and the advance is shown as a liability; the provider's charges are business costs. For VAT, your sales invoices and their VAT are unaffected by financing them: you still account for VAT on your sales in the usual way, and the provider's own charges may carry VAT depending on the service. Ask your accountant how to record a facility before you sign.

A worked example

A small printing firm wins a contract with a retailer that pays on 60-day terms, worth £10,000 a month. Waiting 60 days would leave it £20,000 short while it pays for paper and staff. It takes a confidential invoice discounting facility: an 85% advance on each invoice, with charges that come to about 2% of each invoice's value. Each month it receives £8,500 within two days of invoicing, and the balance, less charges, when the retailer pays. The charges, about £200 a month, are the price of being able to take on the contract at all.

Choosing a provider

Invoice finance is offered by banks, specialist finance companies and, increasingly, online platforms that fund individual invoices rather than a whole sales ledger. Questions to ask any provider:

1. What percentage of each invoice is advanced, and how quickly?
2. What are all the charges: service fee, discount charge, set-up, minimums, audit fees, exit fees?
3. Is the facility for all invoices or selected ones? Selective finance costs more per invoice but avoids financing sales you do not need to.
4. Is it recourse or non-recourse, and exactly what does non-recourse cover?
5. What is the minimum term and notice period?
6. Will customers be told, and who will they deal with?
7. How are disputes and credit notes handled?

Whole-ledger and selective finance

A whole-ledger facility finances all your eligible invoices, usually with a minimum term and a minimum fee, and suits businesses that need a steady source of working capital. Selective invoice finance, sometimes called spot factoring, lets you finance individual invoices when you choose, usually at a higher cost per invoice but with no ongoing commitment. For a small business that only occasionally lands a large invoice on long terms, selective finance can be the more sensible choice.

What providers look at

Providers are more interested in your customers than in you, because your customers' payments are what repay the advance. They look at who your customers are, whether they are businesses rather than households, how reliably they pay, how concentrated your sales are, and how often invoices are disputed. Clean invoicing, clear evidence of delivery and a low rate of credit notes all make finance easier and cheaper to obtain.

Common mistakes

• Comparing headline rates only. Add up fees, discount charges, minimums and exit costs.
• Missing the minimum term. Some facilities run for a year or more.
• Assuming non-recourse covers everything. Disputes are usually excluded.
• Using it to cover losses. Finance brings forward cash from profitable sales; it does not fix unprofitable ones.
• Forgetting the customer relationship. With factoring, the provider's collection style becomes part of how your customers experience you; ask how it chases before signing.
• Financing invoices that are likely to be disputed. Disputed invoices are usually excluded from advances and can trigger recourse.

Ending a facility

Leaving an invoice finance facility takes planning. Most have a notice period, and when the facility ends, the provider is repaid from your outstanding invoices, which can leave a cash gap at exactly the moment the advances stop. Before ending one, build up enough cash or alternative funding to cover the invoices that will no longer be advanced, and check for exit fees. A switch between providers usually involves the new provider settling the old one directly.

Invoice finance and e-invoicing

Invoice finance depends on reliable invoice data: who was invoiced, for what, when and for how much. As UK VAT invoices move to e-invoicing from April 2029, that data will travel in a structured, verifiable form, which may make invoices easier to finance. The e-invoicing hub explains what is known about the mandate.

Related terms

Invoice finance is built on your accounts receivable. The main forms are invoice factoring and invoice discounting. For cheaper ways to be paid sooner, see payment terms and stage payment.

The short version

Invoice finance swaps a fee for time: cash now instead of cash when your customers pay. It suits growing businesses with creditworthy business customers on long terms. Try the cheaper levers first, compare total costs rather than headline rates, read what recourse and non-recourse really mean, and remember that since 2018 most small suppliers cannot be stopped from using it by a clause in a customer's contract.