Invoice finance releases working capital tied up in unpaid customer invoices. Instead of waiting 30, 60, or 90 days for a customer to pay, the business receives 80% to 90% of the invoice value within 24 hours from the finance provider, with the balance released (less fees) when the customer settles. For businesses with strong sales but poor cash flow timing, invoice finance often provides more workable funding than term debt or overdrafts.
Factoring versus discounting
Invoice factoring involves the finance provider taking over the sales ledger. Customers pay the factor directly, and the factor handles collections. This is visible to customers, who see invoices marked for payment to the factoring company rather than the supplier. Factoring suits smaller businesses that benefit from outsourcing credit control, with typical minimum turnover requirements around £100,000 annually.
Invoice discounting is confidential: the business retains the sales ledger and collects from customers, with the finance arrangement invisible to the customer base. This suits larger businesses with established credit control processes. Confidential invoice discounting typically requires minimum turnover of £500,000 to £1 million and audited accounts. Pricing is usually lower than factoring because the provider carries less operational cost.
Advance rates, fees, and market pricing
Advance rates typically sit at 80% to 90% of eligible invoice value, meaning a £100,000 invoice generates £80,000 to £90,000 within 24 hours of upload. Remaining balance releases when the customer pays, less the finance provider’s fees. Not all invoices are eligible: disputed invoices, invoices to overseas customers, invoices past due, and invoices where the customer has previously defaulted may all be excluded from funding.
Total cost of invoice finance typically comprises a service fee (0.2% to 3% of turnover for factoring, 0.15% to 0.5% for discounting) plus a discount charge (typically base rate plus 2% to 4%). For a business with £2 million turnover using confidential invoice discounting, total cost typically runs £15,000 to £35,000 annually depending on usage patterns. This is often lower than the effective cost of equivalent overdraft or term debt when compared like for like.
The market and provider selection
The UK invoice finance market divides between mainstream bank-owned providers (Lloyds Commercial Finance, HSBC Invoice Finance, RBS Invoice Finance) and independent specialists (Bibby Financial Services, Aldermore Invoice Finance, Close Brothers Invoice Finance, Optimum Finance, Kriya, MarketFinance). Independents typically offer more flexible facilities and faster onboarding but at slightly higher cost. Bank-owned providers benefit from cross-referral discounts if the business already banks with the same group.
Selective invoice finance, where the business chooses which invoices to finance rather than committing the whole ledger, has grown significantly since 2020. Providers including MarketFinance, Kriya, and Just Cash Flow specialise in this model. Fees per financed invoice are typically higher than whole-book facilities, but the flexibility to use finance only when needed suits businesses with seasonal or project-based cash flow patterns. This is a genuinely different product from traditional whole-book invoice finance.
AM Commercial Finance arranges invoice finance across the whole provider market. To discuss factoring, discounting, or selective invoice finance for a business, phone 01604 552100 (Monday to Friday, 9am to 6pm) or email info@amcommercialfinance.com.
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