Ultimate Guide to Invoice Finance
Compare the different types of invoice finance, lenders and typical fees
Updated: 22nd September 2025
What is Invoice Finance?
Invoice finance is a fast funding solution that allows businesses to access cash tied up in unpaid invoices. Rather than waiting 30, 60, or even 90 days for clients to pay, companies can unlock up to 95% of their invoice value within 24 hours.
For SMEs, this creates a bridge between issuing invoices and getting paid. And unlike bank loans, which rely on your credit history and business assets, invoice finance is more about your sales ledger quality. The facility is open to startups and grows in size as revenue does.
How Invoice Finance Works (Step-by-Step)
Most invoice finance arrangements follow a similar process.
Step 1: You raise invoices to customers as normal.
Step 2: Submit the invoice(s) to your finance provider
Step 3: Receive up to 95% of the invoice value within 24 hours.
Step 4: When the customer pays, you receive the balance minus fees.
Example:
- Invoice value: £50,000
- Advance rate: 85%
- Immediate advance: £42,500
- Customer pays after 55 days
- You receive: The remaining £7,500 minus service fees
The process is designed to use future income as a way to secure an immediate advance. By bringing forward that inflow, other liabilities can be met. For example, receiving early payment from past invoices to buy stock and fulfil future orders. With many invoice finance providers offering accounting software integration, one-click submissions enable you to gain funding quickly and with minimal hassle.
Types of Invoice Finance Explained
Invoice Discounting
With invoice discounting, you maintain full control over your sales ledger and customer relationships. The arrangement is fully confidential, with customers paying you directly as per usual. It requires strong credit control capabilities, which must be demonstrated during the application process. This is suited to firms that rely on goodwill, word of mouth, repeat custom, or have a naturally strong receivables team.
Invoice discounting tends to be more risky for lenders than factoring, as they have less control over whether your customers will pay on time (or pay at all). As a result, it can be more expensive and is traditionally used by bigger companies with higher turnover and creditworthy customers, whereas smaller firms commonly use invoice factoring.
Invoice Factoring
When Invoice factoring is used, the factoring company takes control over your sales ledger and debt collection. Your customers will be notified that payments should be made to the factoring company, whose collection tactics you’re not in control of (but can gauge through reviews and reputation). The benefit here is that fewer resources are spent chasing customers and credit risk is eliminated.
This is particularly beneficial for over-stretched, smaller companies with many customers, as it not only outsources work but also reduces dependency on a handful of repeat customers in case relations sour.
Selective/Spot Invoice Finance
Instead of handing over your entire sales ledger for the advance, only a select few are put forward for the facility. This is useful for one-off transactions and cash flow gaps, but higher fees are expected because of this flexibility.
Selective invoice finance is suited to firms with large, infrequent project-based sales. They’re naturally high margin, so the higher costs can be absorbed, while the advance can help fund a timely project completion.
CHOCCs (Client Handles Own Credit Control)
This is a hybrid approach where you manage collections, but the facility is still disclosed to the customers. Payments are therefore made into a designated account and a middle ground between factoring and discounting is achieved.
The collection support provided by CHOCCs is suited to firms with poor credit control resources that value their customer relationships. So, it’s for businesses that want invoice factoring, but fear its consequences.
Construction Invoice Finance
Construction is unique in its contracts and late payments. This facility targets this pain point, enabling builders to benefit from milestone billing and certified payments. In short, providers have a better understanding of industry-specific payment cycles.
Advantages
- Quick access to cash reduces the creditor risk
- Faster approval than traditional loans
- Scales with your sales
- Easier to secure than traditional business loans
- Flexible, with no collateral or personal guarantee required
Disadvantages
- Costs can be higher than traditional loans or overdrafts
- May impact customer relationships if the facility is disclosed
- Requires consistent invoicing and solid sales ledger management
- Minimum turnover requirements and B2B only
Best Suited For:
- B2B companies with long payment terms (over 30 days).
- Industries like recruitment, manufacturing, wholesale, and logistics.
- Companies with large margins that can absorb the funding costs.
5. Asset-Based Lending (ABL) vs Invoice Finance
Asset-Based Lending (ABL) provides funding against business assets more broadly. These assets include physical assets like stock, machinery, land, and property, but also include receivables, meaning invoice financing falls under this ABL umbrella.
ABL tends to have a higher ceiling than just invoice financing. There’s greater complexity involved due to the need for close asset monitoring and valuations. And because it goes beyond just sales ledger arrangements, it’s legally more aligned with traditional loan regulations.
How Much Does Invoice Finance Cost?
Discount Fee: 0.5% to 5% of invoice value. This is pre-agreed and fixed in place, so your total cost of financing is clear from the outset. Higher-risk applicants and those applying for the maximum advance (e.g., 95% of the invoice value) will be quoted higher discounted fees.
Service Fee: 0.2% to 1% of the sales ledger revenue. This is a fixed cost to cover administration, underwriting, and processing. However, it can sometimes be an ongoing monthly fee, akin to an account fee.
Example:
- Monthly turnover via invoicing: £100,000
- Discount fee: 1.5% of invoice value (£1,500)
- Monthly facility fee: £150
- Total monthly cost: £1,650 (1.65% of turnover)
In this example, the company collects its own invoices. Should this become an invoice factoring arrangement, where the lender also takes control of the sales ledger, then we can expect a higher discount fee (potentially double).
Fees depend on
- Industry risk
- Regularity over invoices and collection
- Creditworthiness of clients
- The volume of invoices
- Advance amount as a percentage of invoice value
- Trading history, credit score and financial strength (minor considerations)
How to Choose an Invoice Finance Provider
While it can be tempting to go with the first provider you find offering the lowest fee, there are more factors to consider.
- Reputation: Since the FCA doesn’t oversee invoice financing, we cannot rely solely on checking a lender’s FCA authorisation. Instead, they could be a part of either UK Finance or ABFA. Beyond a membership, check their industry reputation and read customer testimonials.
- Sector experience: Providers with industry-specific expertise offer better service and rates. A recruitment-focused provider will understand the regularity and cash flow of your company, and will therefore grant you better advice, understanding, fees, and potentially higher advance limits.
- Integration: Checking API connections with Xero, QuickBooks, or your accounting software and/or CRM. This is essential for fast approval and reduced administration.
- Advance rates: Compare the headline rates against actual funding availability. Calculate the cost as a percentage of turnover to see if you can absorb it into your margins, and then compare this to other financing options.
- Credit control quality: For factoring, due diligence is needed to scrutinise their collection approach and customer service standards. Your customer relationship depends on it.
Top UK Providers:
When comparing the top UK invoice finance providers, here are the main options.
- MarketFinance
- Bibby Financial Services
- Close Brothers Invoice Finance
- Lloyds Bank Commercial Finance
- Aldermore Invoice Finance
- Time Finance
- Novuna
- Natwest Invoice Finance
- RBS Invoice Finance
- Kriya
- Ultimate Finance
- ABN AMRO
- White Oak
Invoice Finance vs Other SME Funding Options
| Funding Type | Speed | Cost | Flexibility | Security Needed |
|---|---|---|---|---|
| Invoice Finance | Fast | Medium | High | Invoices |
| Unsecured Business Loan | Medium | Medium | Medium | Personal Guarantee |
| Overdraft | Fast | Low | Low | Bank Approval |
| Merchant Cash Advance | Fast | High | High | Card Sales |
| Asset Finance / Bank Loan | Slow | Low | Low | Personal/business assets |
When Invoice Finance Is Worth Considering
- You lack assets or do not want to risk using any for security
- Your credit score is poor, and loan applications have been declined
- You don’t have time for a bank loan application
- B2B customers have payment terms of over 30 days
- You sell subscriptions or have stable monthly revenue
When Alternative Types of Business Financing Work Better
- You’re a low-margin business and can’t absorb the costs. Here, a business loan can be cheaper.
- If you only need to access credit for a few days at a time upon month-end, an overdraft or credit card may be cheaper.
- You have large amounts of assets or have a solid business plan that lays out why more capital can be invested with a positive ROI. Here, a bank loan would be suitable.
- If you need money for a new premise or equipment, equipment financing could be more suitable.
How to Apply for Invoice Finance
What you need:
- Recent financial accounts and bank statements.
- Current sales ledger (or the API to connect to it).
- Customer trading history and invoice details.
- Details of existing finance facilities.
How it works:
The application process begins with an initial assessment based on turnover, sector, customer base quality, and basic personal and business details. This form will take around 10 minutes to fill in.
For help with finding suitable lenders, fill in the short form below. Here, you will be matched with suitable lenders and provided with preliminary quotes. You can compare the offers, pick one, then sign up.
This signing-up period takes 5-10 days for full underwriting and account creation. Providers may contact you to discuss your processes and business, but this period primarily involves inspecting your sales ledger and creating legal documentation. Funding is often possible within 24 hours of approval.
Once a facility is set up, you can access funding quickly. New invoices that are automatically updated to the account can be advanced against in a matter of hours.
Conclusion & Next Steps
Invoice finance provides thousands of UK businesses each week with immediate access to working capital. With cash flow being the number one threat to SMEs, such facilities have become important drivers of growth.
Whether you’re managing late-paying customers or gearing up for expansion, it’s worth exploring your options. The key is to decide early on whether you want to retain control over payment collection or not. From there, get several quotes and choose the provider that has a good reputation, transparent pricing, and understands your sector. Focus on total costs rather than headline rates.
FAQs
Can I use invoice finance with bad credit?
Yes, decisions are often based more on your customers’ creditworthiness than on your own. While your credit score may be checked, it’s not legally required to be checked unlike many formal loan types.
Will my customers know?
Only with factoring or CHOCCs. Discounting is usually confidential, but always check with the provider directly.
Is invoice finance regulated?
Yes and no. Many UK providers are authorised by the Financial Conduct Authority (FCA) because they also offer other types of loans, or because they’re a bank. However, since most invoice financing isn’t a typical loan structure, providers that offer invoice financing exclusively may be less regulated, yet still members of UK Finance or ABFA.
What happens if a customer disputes an invoice?
Disputed invoices are usually removed from funding until resolved. Some providers offer support with dispute management, while invoice factoring companies will be solely responsible for solving and collecting the money
What if the customer doesn't pay?
Non-recourse facilities protect against such bad debts, and this loss is absorbed by the provider (though there could be T&C fees). However, most arrangements are recourse agreements, and these require you to buy back unpaid invoices after an agreed period of time. Check your terms carefully.
Will I need a personal guarantee for a secured business loan?
Personal guarantees may be required for secured business loans. They are less common than with unsecured loans, but many lenders still require them in addition to collateral.
Can I use invoice finance for a startup business?
Some providers are clear in their support for startups, provided there is evidence of recurring monthly revenue from B2B customers. Startups three months into trading may struggle to find many providers, but after six months, more options begin to open up. By 12 months, almost all providers are accessible.