Invoice finance is a business funding facility where a lender advances you most of the value of an unpaid customer invoice as soon as you raise it, instead of you waiting 30, 60 or 90 days for the customer to pay. When the customer eventually pays, you receive the balance less the lender fee. It is one of the cleanest ways to unlock cash that is already earned but not yet collected. This article explains how it works, what it costs, and who it actually suits.
How invoice finance works in practice
You invoice your customer on the standard terms. The customer receives the invoice and adds it to their accounts payable queue. Normally you would then wait until the agreed payment date and collect the money.
With invoice finance, you upload the invoice to your lender (or your lender receives it directly through an integration with your accounting system). Within a day or two, the lender advances a percentage of the invoice value to your operating account. The advance rate is usually 80 to 90 per cent of the invoice value, depending on the lender, the industry and the strength of the customer.
When your customer eventually pays the invoice in full, the lender deducts their fee and any outstanding advance, and pays the remainder to you. You have effectively borrowed against the invoice for the time the customer took to pay, and the cost is the lender fee.
The facility scales with your sales. The more you invoice, the more funding is available. That is the structural appeal: it keeps pace with growth without you having to renegotiate facility limits every time the business expands.
The main types: invoice finance vs factoring vs discounting
The three terms get used interchangeably, but they describe slightly different products.
Invoice discounting is the confidential version. You raise the invoice, the lender advances against it, but you continue managing your own collections. Your customer pays you directly and you settle with the lender. The customer never knows the finance is in place.
Factoring (sometimes called debtor finance) is the version where the lender also collects from your customer. The customer pays the lender, not you, and the lender then settles with you. Factoring takes the collection workload off your plate, which can be valuable for fast-growing businesses, but your customers know finance is involved.
Selective invoice finance is the cherry-pick version: you only fund the specific invoices you need to, rather than committing your whole sales ledger. Useful when only some invoices are tying up cash that matters.
Asset-based lending is the bigger-facility cousin. The lender takes security over your receivables plus inventory, sometimes plus plant and equipment, and provides a revolving facility against the combined collateral. It suits larger businesses with significant working capital cycles.
What does invoice finance cost?
Costs vary significantly by lender, structure and industry, but the typical components are: a service fee (often a flat percentage of invoice value, anywhere from 0.5 to 3 per cent) and a discount fee on the advance (effectively interest, usually quoted as a percentage per month or against the prevailing wholesale rate).
A useful framing: if invoices typically take 60 days to be paid, and the all-in cost of the facility is roughly 2.5 per cent of invoice value across the 60 days, that is a real annualised cost of around 15 per cent. The arithmetic varies; the principle of comparing the all-in cost to the value of the cash being released is what matters.
For growing businesses where the alternative is turning away orders because you cannot fund the working capital, paying 15 per cent annualised to free up the cash is often the right trade. For mature businesses with comfortable cash reserves, it usually is not.
Who invoice finance suits
Businesses that sell to other businesses on credit terms (30, 60, 90 days) and feel the squeeze between delivering the work and getting paid. The classic fits are wholesalers, manufacturers, labour-hire and recruitment firms, transport businesses, and service businesses with large B2B contracts.
Less suited: businesses that sell mostly to consumers (B2C) where there are no invoices to fund; businesses with very small or unreliable receivables ledgers; businesses whose customers are concentrated in one or two clients (the lender does not want all the risk in one place).
How to set it up
A typical engagement runs as follows. We sit down for 20 minutes to understand the shape of your business: customer concentration, typical invoice value, payment terms, current cash flow problem. We then compare the lenders most active in your industry, both for advance rate and total cost. We share two or three indicative term sheets so you can see the structure rather than just the headline rate.
Once you choose a lender, the documentation takes a couple of weeks for a standard set-up: the lender wants to see your aged debtor report, customer profiles, accounting integration, and (for factoring) the customer payment workflow. Once the facility goes live, the operational rhythm is invoices in, advances out within 24 to 48 hours.
When invoice finance is not the right answer
The honest test: invoice finance solves a timing problem, not a structural one. If your business is profitable but your cash arrives slower than your costs need it to, the facility makes sense. If your business is losing money on every invoice and you are using the facility to delay confronting that, you are buying yourself a worse problem.
We have walked clients away from invoice finance in this situation, even when they came to us asking for it specifically. It is not a loyalty test of the broker; it is the right answer for the business.
Where to from here
We compare invoice finance, factoring and selective invoice finance across our whole lender panel. You pay us nothing; the lender pays us a commission once the facility settles. A 20-minute brief is enough to work out which structure fits and what it should cost. Book one through our contact page.
Want to talk specifics?
Twenty-minute brief, no obligation.
A real broker on the other end of the line. No fees to clients.
