Invoice Finance UK: Factoring vs Discounting Explained

What is invoice finance?

Invoice finance is a type of business funding that allows you to release cash tied up in unpaid invoices. Instead of waiting 30, 60, or even 90 days for customers to pay, an invoice finance provider advances you a percentage of the invoice value — typically 70–90% — within 24 to 48 hours. The balance, minus fees, is paid to you once the customer settles.

For UK businesses that trade on credit terms, invoice finance can transform cash flow by turning accounts receivable into immediate working capital. It is particularly valuable for fast-growing businesses where cash flow cannot keep pace with revenue growth.

The UK invoice finance market is well-established, with the UK Finance trade body reporting that member firms advance over £20 billion to businesses at any given time.

Factoring versus invoice discounting

There are two main types of invoice finance, and they work differently:

Factoring: The finance provider manages your sales ledger and collects payment from your customers directly. Your customers know you are using a factoring service because they pay the factor, not you. Factoring is suited to smaller businesses that benefit from outsourcing credit control.

Invoice discounting: You retain control of your sales ledger and continue to collect payments from your customers. Your customers are typically unaware of the arrangement. Invoice discounting is suited to larger businesses with established credit control functions.

• Confidential invoice discounting: Your customers do not know about the arrangement. This is the most popular form for mid-sized businesses
• Disclosed invoice discounting: Customers are notified but you still manage collections
• Selective invoice finance: You choose which invoices to finance rather than committing your entire ledger. More flexible but usually more expensive per invoice

Costs of invoice finance

Invoice finance involves two main charges:

Service fee: A percentage of your annual turnover, typically 0.5–3.0%. This covers administration, credit checking, and (for factoring) credit control. Higher turnover businesses negotiate lower percentages.

Discount charge: Interest on the funds advanced, typically 1.5–3.0% above base rate. This is charged daily on the amount advanced until the customer pays.

For example, on a £10,000 invoice with a 1% service fee and discount charge equivalent to 5% per year, the total cost if the customer pays in 45 days would be approximately £162 (£100 service fee + £62 interest).

Eligibility requirements

Invoice finance providers typically require:

• B2B invoicing: You must invoice other businesses (not consumers) on credit terms
• Minimum turnover: Typically £50,000 to £100,000 per year, though some providers work with smaller businesses
• Credit-worthy customers: The provider checks the creditworthiness of your customers, not just your business
• Clean invoices: Invoices must be for goods or services already delivered, not work in progress or future orders
• No disputes: Invoices subject to disputes or contra-trading are usually excluded

Businesses in most sectors can access invoice finance, including recruitment, manufacturing, wholesale, transport, and professional services.

Advantages and disadvantages

Advantages: Improved cash flow, funding that grows with your turnover, no need to offer personal security (the invoices are the security), faster than applying for traditional bank lending, and factoring outsources credit control.

Disadvantages: Ongoing cost that reduces your profit margin, may require a minimum contract period (often 12 months), some arrangements require you to assign your entire sales ledger, and customer concentration issues can arise if a large proportion of your invoicing goes to one customer.

Choosing a provider

Key considerations when selecting an invoice finance provider include their experience in your sector, the advance rate offered, whether they require the whole ledger or allow selective financing, contract length and termination terms, and whether they provide credit insurance to protect against customer insolvency.

Get expert help with business finance

Finding the right invoice finance facility requires understanding the options available and negotiating competitive terms. A specialist broker can compare providers, negotiate fees, and find the arrangement that best suits your business cash flow needs. Nesto matches you with experienced financial brokers who can help businesses access the working capital they need to grow.