Key takeaways
- Invoice financing advances cash against unpaid invoices — usually 80-90% of the value.
- Factoring means the finance company collects payment; discounting means you do.
- The finance company takes a percentage of the invoice value as the fee.
- It is faster than a bank loan and secured against the invoice, not the business.
- Best for businesses with reliable clients who pay slowly — not for chasing bad debt.
What is invoice financing?
Invoice financing is a way to get cash from your unpaid invoices without waiting for the client to pay. A finance company (a factor or an invoice discounter) advances you a percentage of the invoice value — usually 80 to 90% — and then collects the full amount from your client when it is due. You get most of the money now; the finance company takes a fee.
It is not a loan against your business — it is effectively selling your invoice to a third party. The security is the invoice itself, not your assets or your credit rating. For a business with good clients who pay slowly, it can be a fast way to smooth cash flow.
Factoring vs invoice discounting
There are two main types:
- Invoice factoring — the finance company advances you the cash and collects payment from your client. Your client knows you are using a factor, because the payment goes to the factor’s account.
- Invoice discounting — the finance company advances you the cash, but you collect payment from your client as normal. Your client does not know you are using financing. You repay the advance plus the fee when the client pays you.
Factoring is more common for small businesses that do not have a credit control function. Discounting is more common for larger businesses that want to keep their client relationships and credit control in-house.
What does it cost?
The cost of invoice financing is a combination of:
- Discount rate (service fee) — a percentage of the invoice value, typically 0.5% to 3%. This is the cost of the advance.
- Interest on the advance — charged on the money advanced, typically a few percentage points above base rate.
- Additional fees — setup, credit checks, and per-invoice processing fees, depending on the provider.
The total cost depends on the invoice amount, the creditworthiness of your client, and how long it takes them to pay. A client who pays in 30 days costs less than one who pays in 90 days.
When invoice financing makes sense
Invoice financing works best for businesses that:
- Have reliable clients who pay slowly — the financing is secured against the invoice, so the client’s credit matters more than yours.
- Need cash quickly to pay suppliers, staff or tax bills while waiting for payment.
- Have large invoice values — the fee is a percentage, so financing a £500 invoice is rarely worth it; financing a £5,000 invoice can be.
- Cannot get or do not want a bank loan or overdraft — financing is faster and the security is the invoice, not the business.
It does not work for chasing bad debt. If your client is not going to pay, the finance company will not want the invoice. Most factors will run a credit check on your client before advancing.
How to get invoice financing
You approach an invoice finance company (or a broker who works with several), provide details of the invoices you want to finance, and the company runs credit checks on your clients. If approved, the advance is typically in your account within 24-48 hours of the invoice being raised. For ongoing arrangements, you can finance invoices automatically as you raise them.
Alternatives
Before turning to invoice financing, consider:
- Shorter payment terms on your invoices — the cheapest cash flow fix is getting paid sooner.
- Deposits or stage payments — get money in before the work is complete.
- A business overdraft or loan — may be cheaper if you have the credit rating.
Invoice financing is a tool, not a first resort. If your clients pay on reasonable terms and your cash flow is tight but manageable, the cost of financing may be more than the benefit.
Invoices that get you paid
Build clean invoices that are easy to finance — clear terms, due dates and client details. Free, no sign-up.
Frequently asked questions
What is invoice financing?
A way to get cash from unpaid invoices without waiting for the client to pay. A finance company advances you 80-90% of the invoice value now, and collects the full amount from your client when it is due, taking a fee.
What is the difference between factoring and invoice discounting?
With factoring, the finance company collects payment from your client (your client knows). With invoice discounting, you collect payment and repay the advance (your client does not know).
How much does invoice financing cost?
Typically 0.5% to 3% of the invoice value as a service fee, plus interest on the advance at a few percentage points above base rate. The total depends on the invoice amount and how long the client takes to pay.
When should I use invoice financing?
When you have reliable clients who pay slowly and you need cash quickly. It is secured against the invoice, not your business, so your client’s credit matters more than yours. It does not work for chasing bad debt.
Is invoice financing better than a bank loan?
It depends. Financing is faster and the security is the invoice, but the percentage fee can make it more expensive than a loan. If you have the credit rating for a bank loan, it may be cheaper.
Free invoice tools
General guidance only — not legal, tax or accounting advice. Rules and rates can change; check HMRC's current guidance for the latest. Last reviewed 8 October 2026.