Invoice finance: turn unpaid invoices into working capital

If you invoice other businesses on thirty, sixty or ninety day terms, you already know the problem. The work is done and the invoice is raised, but the cash is weeks away, and wages and suppliers still need paying now. Invoice finance lets you draw most of that money as soon as you raise the invoice, rather than waiting for the customer to settle.

How invoice finance works

The mechanics are straightforward. When you raise an invoice, the finance provider advances you a percentage of its value straight away. For example, that is often around 80 to 90 per cent. When your customer pays, you receive the remaining balance, minus the provider's fee.

So on a 10,000 invoice with an 85 per cent advance, you might get 8,500 within a day or two of raising it. When the customer settles the full 10,000, you get the final 1,500 back, less the charge for the service. The facility usually works as a rolling line: as old invoices are paid and new ones go out, your available funding moves with your sales. Because the funding refreshes every time you invoice, a business that is winning more work sees its available cash rise in step, without having to reapply each time.

Factoring versus invoice discounting

There are two main ways to run it, and the difference comes down to who chases payment and whether your customers know.

Factoring

The finance provider manages your sales ledger and collects payment from your customers directly. Your customers know a third party is involved, because they pay the finance company. This takes credit control off your desk, which can help smaller businesses without a dedicated accounts team, but it does mean customers are aware you use the facility.

Invoice discounting

You keep control of your own ledger and chase payment as normal. The arrangement is confidential, so customers deal only with you and need never know a financier is involved. This suits larger or more established businesses that already have their own credit control function. You can compare both on our invoice finance page.

Who it suits

Invoice finance only works if you sell to other businesses on credit terms. It is a strong fit for:

• B2B businesses with long payment terms, like recruitment, manufacturing, engineering and haulage
• Companies growing fast, where every new order ties up more cash in unpaid invoices
• Firms with a reliable customer base that pays in full, just slowly

It is not designed for businesses that sell to the public for immediate payment, because there are no trade invoices to fund.

What it costs

There are usually two charges to understand.

• A service fee, charged as a percentage of your turnover, which covers running the facility and, with factoring, the credit control work.
• A discount charge, which works like interest on the money you have drawn, applied for as long as the advance is outstanding.

Read both figures together rather than focusing on just one. A low headline rate paired with a high service fee can cost more than it first looks. As a broker we lay the total cost out clearly before you commit.

It is also worth asking about the smaller print: whether there is an arrangement fee to set the facility up, a minimum monthly fee, and how long the contract ties you in for. None of these are dealbreakers, but they change the true cost, and they are easy to miss if you only look at the advance rate.

The pros and cons

The upside is cash flow. Instead of your growth being capped by how slowly customers pay, funding scales with your sales, and you can take on bigger orders with confidence.

The trade-offs are real too. It costs more than a standard loan, because you are paying for speed and flexibility. With factoring, customers become aware of the arrangement, which some owners would rather avoid. And you are committing future invoices, so it works best as a planned part of how you fund the business, not a one-off patch. Our invoice finance page sets out how the facility is structured.

The bottom line

Invoice finance releases the cash trapped in unpaid invoices, so long payment terms stop holding you back. Factoring hands over credit control and is visible to customers, while discounting stays confidential and keeps you in charge. It costs more than a term loan, but for a growing B2B business the steadier cash flow can be worth it. Just B2B is a credit broker, not a lender, and we compare the options across our panel so you see the real total cost. For more, read more articles.