Invoice finance for UK companies: release cash from invoices

Invoice finance turns your sales ledger into a funding line: the lender funds your approved invoices, advances most of their value and settles the rest when customers pay. Behind the simple steps sits a set-up process worth understanding before you apply.

1. Assessment: the lender reviews your aged debtors, customer list, terms of trade and accounts to decide which customers and invoices it will fund.
2. Due diligence: many lenders survey your sales ledger and may contact a sample of customers to confirm invoices are genuine and undisputed.
3. Legal documents: you sign the agreement and usually assign your book debts. Lenders often also take a debenture and ask directors for a guarantee or indemnity.
4. Existing ledger: some lenders fund invoices you have already raised on day one, which can release a sizeable sum at the start.
5. Ongoing funding and reconciliation: new invoices increase what you can draw, customer payments reduce what you owe, and the lender deducts its charges as it goes.

The facility is linked to the quality of your invoices, not just the size of your business. Clean paperwork and customers who pay reliably usually mean more funding on better terms. Our guide on how invoice finance works covers the basics for newcomers.

The right type depends on two questions: do you want the lender to chase your customers, and do you want to fund your whole sales ledger or only some invoices? Your answers usually point to one of three routes.

Invoice factoring: funding plus a collections service

With invoice factoring, the lender runs your sales ledger and collects payments, and customers know it is involved. It tends to suit smaller or fast-growing companies without a dedicated credit controller.

Invoice discounting: funding while you keep control

With invoice discounting, your own team keeps chasing customers and the facility can often stay confidential. Lenders usually expect a larger, established business with reliable systems and a well-run ledger.

Selective or single invoice finance: funding on demand

Selective invoice finance, also called single invoice finance or spot factoring, lets you fund individual invoices or chosen customers when you need cash, often with no long minimum term. The cost per invoice is usually higher, so it suits occasional use better than monthly use.

A quick decision guide

• You want collections handled for you, or debtor days keep creeping up: factoring is often the better fit.
• You have a credit control team, good systems and prefer customers not to know: discounting is often the better fit.
• You only need cash occasionally, perhaps for one large customer or a seasonal spike: selective invoice finance may be enough.
• You worry about a major customer failing: ask about non-recourse terms or bad debt protection, available alongside any of the three.

Many companies move from one type to another as they grow. Our guide to factoring vs invoice discounting compares the two whole-ledger options side by side.

Invoice finance is usually priced through a service fee and a discount charge, plus possible extras. What you pay overall depends on how much you draw, for how long, and how much work and risk the lender takes on.

• Service fee: usually a percentage of invoices put through the facility, sometimes with a minimum annual amount. Typically higher for factoring, because the lender also runs credit control.
• Discount charge: similar to interest, charged on money you actually draw, often as a margin over a reference rate.
• Single invoice fees: selective facilities may charge one fee per invoice instead of separate service and discount charges.
• Set-up, audit and survey fees: to cover initial and ongoing reviews of your ledger.
• Bad debt protection: an extra charge if you choose non-recourse cover.
• Other charges: these may include same-day payment fees, extension fees on old invoices and exit fees.

Lenders price on turnover, customer quality, average invoice size, payment speed and how often invoices are disputed. Minimum fees often matter more than headline rates: if turnover falls below the level the pricing assumed, a minimum annual fee can push the effective cost much higher. Compare the total yearly cost at a realistic turnover.

Illustrative example only: actual costs depend on the lender and your circumstances.

Imagine a wholesaler raises a £50,000 invoice on 60-day terms. Its facility advances 85%, charges a service fee of 1% of invoice value and a discount charge of 0.75% per month on the money drawn.

• Advance: £42,500 (85% of £50,000)
• Service fee: £500 (1% of £50,000)
• Discount charge for two months: £637.50 (0.75% × 2 × £42,500)
• Total cost: £1,137.50
• Balance released when the customer pays: £6,362.50 (£50,000 minus £42,500 minus £1,137.50)

If the customer paid in 30 days, the discount charge would halve to £318.75, which shows how payment speed drives cost. Test your own figures in our invoice finance calculator.

You can raise the value of your eligible invoices multiplied by the advance rate. The facility limit is a ceiling that moves with your ledger, not a sum paid upfront.

Lenders usually exclude invoices beyond a set age, disputed or credited invoices, debts owed by connected companies, and contra balances where a customer also supplies you. Concentration limits then cap how much one customer can make up.

Invoices that depend on something still to happen are harder to fund, such as stage payments and retentions in construction, pro forma invoices, or part-completed contracts. Mention these early, because only some lenders consider them.

The main risks sit in the contract terms rather than the headline rate: how long you are tied in, what it costs to leave and what security you give.

• Minimum term and notice period: leaving early or without proper notice can trigger a termination fee.
• Security: an assignment of debts and often a debenture, which can affect what other lenders will offer later.
• Personal guarantees and indemnities: directors may guarantee the company's obligations or indemnify the lender if invoices prove invalid.
• Recourse period: when an unpaid invoice must be repaid or replaced.
• Exit arrangements: how the balance drawn is repaid when the facility ends.
• Reporting duties: breaches can lead to reduced funding, extra fees or, on a confidential facility, customers being notified.

Invoice finance is usually strongest when the cash gap is caused by customers taking time to pay. For other needs, compare:

• Revolving credit facility: a flexible limit you draw and repay, not tied to invoices. It can suit companies whose cash needs do not follow their invoicing.
• Working capital finance: a lump sum over a fixed term, which may suit a one-off need where an ongoing facility is unnecessary.
• Trade finance: pays suppliers before goods are sold, which invoice finance cannot do because no invoice exists yet.

Sometimes, yes. Because invoice finance relies heavily on your customers and invoices, some lenders are more flexible about your company's own credit history than for an unsecured loan, but every lender sets its own rules.

• Short trading history: minimum trading periods range from a few months to two or three years. Factoring and selective funding are often more open to younger companies than confidential discounting.
• Adverse credit: defaults or county court judgments do not rule a company out with every lender, but will be considered. Being upfront saves time.
• Low profits or losses: a loss explained by investment or a one-off event is usually viewed differently from ongoing losses.

What usually matters most is a clean ledger. The final decision always rests with each lender.

Invoice finance for limited companies, LLPs and partnerships of four or more partners is generally unregulated business finance. Consumer Credit Act protections generally do not apply, so your rights are mainly those written into the agreement.

Welcome Finance is not authorised or regulated by the FCA and arranges unregulated business finance only. Read every agreement in full, including the fee and termination schedules, and consider independent legal or accounting advice. Our guide to regulated vs unregulated business finance explains more.

We help you work out which type of invoice finance suits your company, then approach suitable lenders on our panel. One dedicated relationship manager, a real person, supports you by phone, email and chat from first enquiry until the lender pays out.

1. Check your eligibility in about 60 seconds, without affecting your credit score.
2. Talk through your customers, terms and invoice sizes with your relationship manager.
3. We send your application to lenders on our panel likely to consider it. Lenders run their own credit checks only after you decide to apply.
4. We help you compare offers on total cost, minimum terms, notice periods and security.
5. We support you through the lender's survey and documents until funds are released.

We charge you no fee. We are paid a commission by the lender when your finance completes. You can ask how much we will receive, and it can differ between lenders.

Do I have to put all my customers through the facility?

On whole-ledger factoring or discounting, usually yes, although some lenders agree to leave out specific customers. Selective invoice finance lets you choose invoice by invoice.

How long does an invoice finance agreement last?

Whole-ledger facilities usually have an initial minimum term, which varies by lender, then a notice period. Selective facilities often have no minimum term.

Can I move my facility to another lender?

Usually, once you have given notice. The new lender typically pays off the old one and takes over the ledger. Check exit fees first.

Will invoice finance affect my ability to get other business finance?

It can, because the lender often takes security over your debtors or a wider debenture. Another lender may need its agreement before taking security, which can often be arranged.

Can a construction company use invoice finance?

Some lenders consider construction, but stage payments, retentions and applications for payment are harder to fund than invoices for completed work.

What is a concentration limit?

A cap on how much of your funded ledger one customer can owe, usually a percentage. Invoices above it are usually not funded until that balance falls.

What happens if a customer disputes an invoice?

Disputed invoices usually drop out of your available funding until resolved, and you may need to repay any advance made against them.

Is selective invoice finance cheaper than a whole-ledger facility?

Per invoice, usually not. It can still cost less overall if you need funding only occasionally, because you avoid minimum fees and ongoing charges.