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If your business sends invoices and waits thirty, sixty or ninety days to be paid, invoice finance turns those unpaid invoices into cash you can use now. It is one of the most useful forms of business finance, and one of the most misunderstood. This guide explains how invoice finance works, the difference between factoring and discounting, and which suits different businesses.
In short. Invoice finance advances you most of the value of an unpaid invoice straight away, rather than waiting for the customer to pay. Factoring includes the lender chasing payment for you, so your customers know it is involved. Discounting leaves you in control of collections and stays confidential. The right one depends on whether you want the credit control help or the privacy.
The idea is simple. You raise an invoice, and instead of waiting for the customer to pay, a finance provider advances you a large share of its value up front, often around 80 to 90 percent, within a day or so. When the customer pays, you receive the remaining balance, minus the provider fees.
It is not a loan against your property. The invoices themselves are the security, which is why invoice finance can grow with your sales: the more you invoice, the more funding is available. That makes it particularly useful for businesses growing fast and feeling the gap between doing the work and getting paid.
Factoring bundles the funding with credit control. The provider advances the cash and also takes over chasing your customers for payment, running the sales ledger on your behalf.
The upside. You hand off the time and hassle of chasing invoices, which suits smaller businesses without a dedicated credit control function. It can also mean invoices are chased more professionally and paid sooner.
The trade off. It is usually disclosed, meaning your customers know a finance provider is involved because they pay them directly. Some businesses are comfortable with that, others worry about how it looks.
Discounting provides the same funding but leaves you in charge of collections. You still chase your own customers and run your own ledger, and the arrangement is usually confidential, so customers need not know a provider is involved at all.
The upside. Privacy and control. Your customer relationships are unchanged, and it suits businesses with their own credit control team.
The trade off. You keep the work of chasing payment, and providers usually reserve discounting for businesses with a proven, well run ledger, so it can be harder to qualify for than factoring.
Invoice finance is priced with two main charges.
Service fee. A percentage of turnover for running the facility, higher for factoring because it includes credit control.
Discount charge. Effectively interest on the money advanced, charged for the period until the invoice is paid.
✓ Funding that grows automatically as your sales and invoices grow.
✓ Cash released within a day or so of raising an invoice, not after the payment terms.
✓ Factoring offloads credit control, discounting keeps it in house and confidential.
✗ Assuming the advance is the full invoice value, when a portion is held back until the customer pays.
✗ Overlooking the service fee and discount charge, which together make up the true cost.
Say you raise a 10,000 pound invoice on sixty day terms. With an 85 percent advance, the provider releases 8,500 pounds within a day, giving you cash to pay wages and suppliers rather than waiting two months. When your customer pays the 10,000 pounds, you receive the remaining 1,500 pounds less the fees. The cost is the service fee and the discount charge for those sixty days, which you weigh against the value of having the 8,500 pounds now rather than later. For a business turning that cash into more work, the maths often favours the finance.
Invoice finance is about cash flow, not borrowing to plug a hole. Used well it releases money already owed to you, so growth does not stall while you wait to be paid. Choose factoring if you want the credit control taken off your hands, and discounting if you want to keep collections yours and the arrangement private.
Choose factoring if you are smaller, do not have a credit control team, would value handing off the chasing, and you are comfortable with customers knowing a provider is involved.
Choose discounting if you have your own credit control, want to keep customer relationships and collections in house, and prefer the arrangement to stay confidential.
There are also selective options, where you finance single invoices or a chosen few rather than the whole ledger, useful if you only need occasional cash flow support rather than a full facility.
Factoring includes the provider chasing your customers and is usually disclosed to them. Discounting leaves you to chase your own invoices and is usually confidential.
Typically around 80 to 90 percent within a day or so, with the balance paid to you, minus fees, once your customer settles the invoice.
Not in the usual sense. The invoices are the security, and the funding grows with your sales rather than being a fixed lump sum you borrow and repay.
With factoring, usually yes, because they pay the provider. With confidential discounting, usually no, because you still handle collections yourself.
Mainly a service fee, a percentage of turnover for running the facility, and a discount charge, effectively interest on the advance until the invoice is paid.
Yes. Selective or single invoice finance lets you fund one invoice or a chosen few rather than the whole ledger, useful for the occasional cash flow need rather than an ongoing facility.
This guide is general information, not financial or credit advice. Compare Commercial is not authorised or regulated by the FCA. We introduce UK limited companies to third-party finance providers.