Invoice Finance UK: How Factoring and Discounting Work, What It Costs and Who It Suits

What Invoice Finance Is and How It Works

When a UK business issues a B2B invoice on credit terms - say 30 or 60 days - it has earned the revenue but has not received the cash. Invoice finance unlocks that cash immediately. The business submits the invoice to a finance provider, who advances the majority of the invoice value - typically 80 to 90 percent - within 24 hours. When the customer eventually pays, the provider releases the remaining balance to the business minus its fees.

The key difference from a conventional loan is that the advance is secured against the receivable (the invoice), not against the business's fixed assets, property, or personal guarantee. Because of this, approval depends primarily on the creditworthiness of the business's customers rather than the applicant's own credit history or trading age. This makes invoice finance accessible to younger businesses and those with limited credit history that would struggle to qualify for bank lending.

Invoice finance is not a single product. It covers several related structures - factoring, discounting, spot finance, and asset-based lending - each with different cost, control, and disclosure characteristics.

The Step-by-Step Process

1. Raise the invoice: your business completes work or delivers goods and issues an invoice to a business customer on agreed payment terms (30, 60, or 90 days)
2. Submit to the provider: the invoice is submitted to the finance provider, either via an online portal or automated integration with your accounting software
3. Advance released: the provider approves the invoice and releases 80-90% of the value - typically within 24 hours, sometimes the same day
4. Customer pays: on their normal payment terms, the customer either pays the finance provider directly (factoring) or pays you (discounting)
5. Balance released: once the customer pays in full, the provider releases the remaining 10-20% to you, minus their service charge and discount fee

Factoring vs Discounting: Which Is Right?

The most important decision in invoice finance is whether to use factoring or discounting. The products deliver the same advance but differ in who collects payment and whether customers know about the arrangement.

Choose factoring when you want to outsource credit control entirely, your business is newer and the provider's collections infrastructure adds value, or you want to reduce internal admin burden. Customers will know a third party is involved.

Choose discounting when maintaining confidential and direct customer relationships is commercially important, you have the internal resource to manage collections, and you want the lower cost structure that comes without outsourced credit control. Most larger businesses with established sales ledgers use discounting.

Recourse vs Non-Recourse: Who Bears the Bad Debt Risk?

Both factoring and discounting can be structured as recourse or non-recourse. This determines who absorbs the loss if a customer becomes insolvent and cannot pay.

Recourse: your business must repay the advance if the customer defaults. The credit risk remains with you. Recourse facilities are cheaper because the provider bears less risk, and advance rates are typically higher (up to 90%). This suits businesses with reliable, established customers.

Non-recourse: the finance provider absorbs the loss if the customer becomes insolvent. This is sometimes called bad debt protection. Non-recourse facilities cost more - typically an additional 0.3-1.5% of invoice value on top of standard fees - but protect the business against the financial shock of customer insolvency. The protection may not cover all non-payment scenarios (for example, disputed invoices or slow-pay are typically not covered); always read the specific bad debt protection terms carefully.

Whole Ledger vs Selective (Spot) Invoice Finance

Traditional invoice finance facilities are whole ledger arrangements: the business assigns all eligible invoices to the provider. This gives the provider full visibility of the debtor book, allows better pricing, and is the standard structure for ongoing facilities.

Selective or spot invoice finance lets businesses submit individual invoices on an ad hoc basis without committing their entire ledger. Providers including Kriya and Bibby Spot offer this model. It costs more per invoice than whole ledger - the provider takes on greater concentration risk - but it suits businesses with irregular or project-based invoice patterns, or those wanting to test invoice finance before committing to a whole ledger arrangement.

What Invoice Finance Costs in 2026

Invoice finance has two mandatory cost components. The service charge (0.5-3% of invoice value) covers administration, credit control where the provider manages collections, and bad debt protection where included in the facility. The discount rate is interest charged on the cash advanced, expressed as a margin above a reference rate - typically the Bank of England base rate or SONIA.

With the BoE base rate at 4.25% in June 2026, a typical discount margin of 3% produces an effective annual rate of approximately 7.25% on drawn balances. The total cost of invoice finance depends heavily on how much of the facility is drawn at any one time, and how quickly customers pay. A business that turns its invoices in 30 days pays less in discount charges than one with 90-day terms, even on identical headline rates.

Selective invoice finance charges differently - typically a flat fee of 1-3% per invoice, rather than a split service charge and discount rate. This makes spot finance more expensive on an annualised basis but more predictable and suitable for one-off use.

Eligibility: Who Can Use Invoice Finance

• B2B sales only: the business must invoice other businesses on credit terms. Consumer-facing retail and B2C businesses are not eligible
• Undisputed invoices: only invoices that are undisputed and free of set-off rights or contra arrangements are eligible for advance
• Creditworthy customers: the provider will assess the creditworthiness of your debtors. Invoices against customers with poor credit may not be advanced
• Minimum turnover: most whole ledger providers require minimum annual B2B turnover of £50,000-£100,000. Spot providers can be more flexible and may consider businesses from day one of trading
• Concentration limits: most providers cap the maximum exposure to a single debtor at 25-40% of the total ledger. Businesses that invoice predominantly one customer may face concentration restrictions

UK Invoice Finance by Sector (UK Finance 2025)

Recruitment is the dominant sector for invoice finance because agencies carry large and consistent debtor books where the gap between placing a worker and being paid by the end client can run to 60-90 days. Manufacturing, transport and logistics, and construction all follow the same pattern: businesses with significant working capital tied up in invoices issued on extended terms to creditworthy counterparties.

Invoice Finance Under the Growth Guarantee Scheme

Invoice finance is one of the five product types covered by the Growth Guarantee Scheme (GGS). Under GGS, accredited lenders can provide invoice finance facilities from £1,000 to £2 million per business group (£1 million for Northern Ireland), with terms up to 3 years and a 70% government-backed guarantee to the lender. GGS invoice finance is subject to the same eligibility rules as the wider scheme: turnover under £45 million, UK trading, not in financial difficulty. For businesses whose customer base might otherwise make a provider cautious about concentration risk, a GGS-backed facility can help unlock access.

What Documents You Need to Apply

Whether applying for factoring, discounting, or spot invoice finance, providers will need a consistent set of information to assess the facility. Having this ready before approaching a provider speeds the process significantly.

• Latest filed accounts: most providers want two to three years of filed accounts. For businesses under two years old, management accounts to the most recent month-end are acceptable
• Aged debtors list: a breakdown of all outstanding invoices by customer, showing the invoice date, due date, amount, and any disputed or overdue items. This is the single most important document in an invoice finance application - it tells the provider exactly what they are being asked to advance against
• Aged creditors list: outstanding payables by supplier. Providers use this to assess whether any set-off or contra arrangements exist that could reduce the value of the debtor book
• Recent bank statements: typically three to six months. Providers look at cash flow patterns, average monthly receipts, and whether the account is consistently in credit
• Sample invoices and copy contracts: providers may request sample invoices to verify they are undisputed, correctly raised, and free of assignment restrictions. Some customer contracts contain anti-assignment clauses that prohibit invoices being sold or pledged - these invoices are not eligible for invoice finance
• Management information: current year trading figures including turnover, gross margin, and debtor days. Providers want to understand the trajectory of the business, not just its historical position
• Director details: identity verification (passport or driving licence) and proof of address for all directors or partners

Anti-assignment clauses in customer contracts are a frequently overlooked issue. If a significant portion of a business's customers have contracts prohibiting assignment of receivables, a substantial part of the debtor book may not be eligible for invoice finance. Review key customer contracts before applying, and flag any restrictions to the provider upfront.

How to Switch Invoice Finance Provider

Businesses on whole ledger facilities are often tied to a provider by a notice period and a concentration of assigned receivables. Switching is possible but requires careful sequencing. The key steps are:

1. Check your notice period: most whole ledger agreements require 90 to 180 days notice to terminate. Read the termination clause in your facility agreement before approaching a new provider
2. Get competing indicative terms first: approach two or three alternative providers while still on the existing facility. Indicative offers can usually be obtained without a hard credit search and without informing your current provider
3. Understand the run-off period: when you terminate a facility, the existing provider will continue to collect on invoices already assigned until they are paid. During this run-off period you may need bridging from the new provider to maintain cash flow
4. Notify customers: if switching from factoring, customers will receive updated payment instructions from the new provider. Allow time for this change to reach accounts payable teams and take effect
5. Benchmark every 2 to 3 years: pricing in the invoice finance market shifts as providers adjust their risk appetite. Existing clients of bank-backed providers should benchmark against independent specialists periodically, and vice versa

Invoice Finance vs Overdraft vs Business Loan

Invoice finance, overdrafts, and term loans are all working capital tools, but they work differently and suit different needs. The right choice depends on the source of the cash flow gap and how predictable and recurring that gap is.

• Invoice finance: grows automatically with sales. As turnover increases and more invoices are raised, more cash is available. The facility is self-liquidating - the advance is repaid when the customer pays. Best when the cash flow gap is caused by customer payment terms rather than underlying business losses
• Overdraft: provides a revolving credit line up to a set limit. Flexible for short-term fluctuations but typically expensive (often 10-18% EAR on drawn balances) and can be withdrawn with limited notice. Does not grow with the business automatically. Best for smoothing unpredictable short-term gaps
• Term loan: fixed sum repaid over a defined period. Predictable monthly payments make budgeting straightforward, but the facility does not flex with turnover. Best for a specific, identifiable need such as equipment purchase or premises fit-out rather than recurring working capital

A business with a recurring working capital gap driven by extended customer payment terms will almost always find invoice finance cheaper and more scalable than a revolving overdraft, because the advance grows in proportion to the sales it finances rather than being capped at a fixed limit set at the last review.

Late Payment and Invoice Finance

The UK has a persistent late payment problem. The Prompt Payment Code and the Late Payment of Commercial Debts (Interest) Act 1998 give businesses the right to charge statutory interest and compensation on overdue invoices, but in practice most businesses do not exercise these rights for fear of damaging customer relationships.

Invoice finance does not solve late payment directly - if a customer pays 30 days late against 30-day terms, the business has already received the advance on day one but the discount charge accumulates for those additional 30 days. However, factoring can reduce late payment indirectly: when a professional credit control team chases payment on behalf of the factor, customers often pay more promptly than when chased informally by the business itself. Providers typically report that debtor days reduce by 10 to 20 days on average after a factoring facility is established.

Exiting Invoice Finance: What to Expect

Exiting a whole ledger invoice finance facility is not simply a matter of giving notice. Providers have a security interest in the assigned receivables, which means the facility cannot be terminated until all outstanding advances are repaid. In practice this means:

• The run-off period (while existing invoices are collected and advances repaid) typically takes 60 to 90 days after notice is served
• The provider retains the right to continue collecting from customers during run-off, even after notice is given
• If the business has a new provider lined up, the new provider may agree to fund the run-off period, but this requires co-ordination between the two providers
• Early exit fees may apply if the facility has a minimum term - check the agreement before giving notice

Spot invoice finance has no such complications - each invoice is a standalone transaction with no ongoing commitment, and the business can simply stop submitting invoices at any time.

Common Misconceptions

"It will damage my customer relationships." Discounting is entirely confidential - customers pay you directly and never know a finance provider is involved. Even factoring, where the provider contacts customers, is well understood in B2B sectors such as recruitment and construction where it is standard practice.

"My business is too small." Spot invoice finance has no minimum turnover requirement at many providers. Businesses from their first invoice can use selective facilities to advance individual invoices. The minimum for most whole ledger arrangements is £50,000-£100,000 in annual B2B turnover.

"It is expensive." On a like-for-like basis, invoice finance is often cheaper than the opportunity cost of waiting 60-90 days for payment - particularly when that delay forces a business to use a more expensive product such as an overdraft or short-term loan. The total cost depends on facility utilisation and payment speed.

"I need perfect credit to qualify." The primary credit assessment is on your customers, not you. Businesses with limited trading history or weaker personal credit can still access invoice finance if their customers are creditworthy businesses.

"Once I start I cannot stop." Spot invoice finance has no lock-in at all. Whole ledger facilities have notice periods of typically 90 to 180 days, but these are disclosed upfront in the agreement. Understanding the exit terms before signing is a standard part of due diligence on any facility.

What is invoice finance?

Invoice finance is a funding arrangement where a UK business receives an immediate cash advance of typically 80-90% of the value of its outstanding B2B invoices, rather than waiting for customers to pay on standard terms. It is not a loan - the advance is secured against receivables (invoices), not business property or personal assets. The balance, minus fees, is released when the customer pays.

What is the difference between invoice factoring and invoice discounting?

With factoring, the finance provider manages collections and contacts your customers directly - the arrangement is disclosed. With discounting, you retain control of collections, customers pay you directly, and the arrangement is confidential. Discounting costs less because the provider does not provide a credit control service. Both products advance 80-90% of invoice value upfront.

What is recourse vs non-recourse invoice finance?

Recourse means your business must repay the advance if a customer defaults - the credit risk stays with you. Non-recourse (bad debt protection) means the provider absorbs the loss if a customer becomes insolvent. Non-recourse facilities cost more, typically an additional 0.3-1.5% of invoice value, but protect against customer insolvency.

How much does invoice finance cost in the UK in 2026?

Two components: a service charge of 0.5-3% of invoice value, plus a discount rate of approximately BoE base rate plus 1.75-4.5% on drawn balances. With the June 2026 base rate at 4.25%, effective rates on drawn funds run approximately 6-8.75%. Total cost depends on how much of the facility is drawn and how quickly customers pay. Request a full itemised breakdown from any provider before committing.

Can startups use invoice finance?

Yes, in many cases. Because approval is based primarily on the creditworthiness of your customers rather than your own, businesses from their first year - or even earlier - can access selective or spot invoice finance, provided they have B2B invoices with creditworthy customers. Whole ledger facilities typically require minimum annual B2B turnover of £50,000-£100,000.

What is selective or spot invoice finance?

Spot invoice finance allows a business to advance individual invoices on an ad hoc basis, without committing the entire debtor book to a whole ledger facility. It costs more per invoice - typically a flat 1-3% fee - but requires no minimum volume commitment and suits businesses with irregular funding needs or those wanting to try invoice finance before taking a full facility.

What are concentration limits in invoice finance?

Most providers cap maximum exposure to a single debtor at 25-40% of the total ledger value. If a business invoices predominantly one customer, the provider may decline to advance against invoices beyond that cap. Businesses with highly concentrated customer bases may need to seek providers with higher concentration limits or consider other funding products.