How does invoice finance actually work?
Invoice finance works by advancing you a percentage of the value of your unpaid invoices, usually 80-90%, within 24-48 hours of raising them, rather than waiting the usual 30, 60 or 90 days for customers to pay. A lender releases most of the cash upfront, collects payment from your customer, then pays you the remaining balance minus their fee. It turns invoices you’ve already issued into working capital you can use now.
Why does invoice finance exist in the first place?
Most businesses that sell to other businesses face the same problem: you deliver the work, raise the invoice, and then wait. Thirty days is standard. Sixty or ninety isn’t unusual in construction, manufacturing, or wholesale. Meanwhile you still need to pay staff, suppliers, and rent this month, not next quarter.
Invoice finance closes that gap. Instead of your cash being tied up in a debtor ledger, a lender releases it against the invoices you’ve already raised. You’re not borrowing against future sales you hope to make. You’re accessing money for work you’ve already done and delivered.
What are the actual steps involved?
The mechanics are fairly consistent across lenders, even though pricing and flexibility vary.
- You raise an invoice to your customer as normal, for goods or services already delivered.
- You submit that invoice to the finance provider, usually through an online portal linked to your accounting software.
- The lender advances a percentage of the invoice value, typically 80-90%, into your account within 24-48 hours.
- Your customer pays the invoice on their normal terms, either directly to the lender (factoring) or to you, who then repays the lender (invoice discounting).
- The lender releases the remaining balance, minus their fee, once payment is collected.
That fee is usually a combination of a service charge and a discount rate (similar to interest, calculated on how long the invoice remains outstanding).
What’s the difference between factoring and invoice discounting?
The two main structures work differently in terms of who collects the debt and whether your customers know finance is involved.
With factoring, the lender takes over collection of the invoice directly from your customer. Your customer pays the finance company, not you. This suits businesses that want the credit control function taken off their hands, though it does mean your customers see a third party named on the invoice.
With invoice discounting, you retain control of collections. Your customer pays you as normal, and you then settle with the lender. This is typically used by larger, more established businesses with a proper credit control process already in place, because the lender wants confidence that debts will actually be collected on time. It’s also confidential, so customers aren’t aware finance is being used.
Which invoices actually qualify?
Not every invoice is eligible. Lenders generally want to see:
- Business-to-business invoices, since this product isn’t designed for consumer sales
- Invoices for completed work, not deposits or work in progress
- Customers with a reasonable credit standing, since the lender is ultimately relying on that customer paying up
- Invoices that aren’t already heavily disputed or overdue, since these carry more risk of non-payment
Some lenders will finance your whole ledger; others let you select specific invoices or specific customers you want funded, known as selective invoice finance.
What happens if a customer doesn’t pay?
This depends on whether your facility is “recourse” or “non-recourse.” With recourse factoring, if your customer fails to pay within an agreed period, the invoice comes back to you and you’re responsible for the shortfall. With non-recourse factoring, the lender absorbs some of that bad debt risk, usually in exchange for a higher fee. Most facilities in the UK are recourse-based, so it’s worth checking this detail carefully before signing anything.
Is invoice finance only for businesses in financial difficulty?
No. That’s one of the more persistent misconceptions. Plenty of profitable, growing businesses use invoice finance simply because their growth is outpacing their cash conversion cycle. If you’re winning more contracts than your current cashflow can comfortably support, invoice finance lets you keep fulfilling orders without waiting on customer payment terms to catch up.
That said, it’s also genuinely useful for businesses under pressure: companies managing VAT arrears, County Court Judgements, or a rough trading patch. Because the funding is tied to the value of your invoices rather than your credit history or balance sheet strength alone, it can be accessible even when other forms of lending have closed off. This is where we spend a lot of our time at CDW Financial Specialists, helping businesses in genuinely difficult circumstances find funding routes that traditional high street banks won’t offer.
How much does invoice finance cost?
Costs are usually made up of two elements: a service fee (often 0.5% to 3% of invoice value, covering admin and credit control) and a discount fee (similar to an interest rate, charged on the amount advanced for the time it’s outstanding). The exact figures depend heavily on your industry, invoice volume, customer quality, and which lender you use, which is exactly why comparing across a panel of lenders rather than approaching one bank directly tends to produce a better result.
Common questions about invoice finance
Do my customers find out I’m using invoice finance? It depends on the structure. Factoring is disclosed, meaning your customer pays the finance company directly and will see this on correspondence. Invoice discounting is usually confidential, so your customer continues paying you as normal and is unaware a lender is involved.
Can a new or small business use invoice finance? Yes, though options may be more limited than for an established business with a strong ledger. Selective invoice finance, where you fund individual invoices rather than your whole debtor book, is often a good starting point for smaller or newer companies.
Does invoice finance affect my relationship with customers? With invoice discounting, no, since it’s confidential and customers aren’t aware. With factoring, there can be an adjustment period, since a third party now handles collections, though most lenders manage this professionally and customers are generally unbothered once they understand it’s routine.
What’s the difference between invoice finance and a business loan? A loan gives you a fixed sum repaid over an agreed term regardless of your sales. Invoice finance scales with your invoice volume: the more you invoice, the more funding is available, and there’s no fixed repayment schedule since it’s tied to your customers paying.
Getting the right facility set up
Invoice finance isn’t a one-size-fits-all product. The right structure, recourse or non-recourse, factoring or discounting, whole-ledger or selective, depends on your customer base, your credit control resources, and what you’re actually trying to solve. Approaching lenders one by one to compare terms eats up time you probably don’t have if cashflow is already tight.
At CDW Financial Specialists, we work across a full panel of lenders through our NACFB membership, which means we can match your business to the right facility rather than the only facility one bank happens to offer. We handle the process from initial conversation through to completion, and we’re upfront about every fee involved from the start. If you want to talk through whether invoice finance fits your situation, get in touch via CDW Financial Specialists and we’ll walk you through your options.