Invoice finance: a complete guide

How invoice finance works

If you sell on credit terms, your cash is often locked inside a stack of unpaid invoices. Invoice finance unlocks it. A lender advances you a large share of an invoice's value — commonly up to around 80–90% — as soon as you raise it, rather than making you wait the full 30, 60 or 90 days for your customer to pay.

When the customer settles, the lender releases the remaining balance, less their fee. So instead of a single payment arriving months after you did the work, you get most of the money almost immediately and the rest on settlement. The facility scales automatically: as your sales ledger grows, so does the funding available. That makes it a natural fit for businesses whose main constraint is the gap between delivering and getting paid.

Factoring vs invoice discounting

There are two main forms, and the practical difference is about who chases payment and whether customers know.

	Factoring	Invoice discounting
Who collects payment	The lender	You do
Customers aware?	Usually yes	Usually no (confidential)
Best for	Smaller firms wanting credit-control help	Established firms with their own systems
Admin burden	Lower — outsourced	Higher — you keep control

With factoring, the lender runs collections, which can save a small team real time but means your customers deal with the financier. With invoice discounting, you keep control of your ledger and the arrangement stays confidential, which suits businesses protective of customer relationships.

What it costs

Invoice finance usually carries two charges. A service fee (often a small percentage of turnover) covers running the facility and, in factoring, credit control. A discount charge works like interest on the funds you draw, accruing for as long as the invoice is outstanding. Illustrative market pricing might put the service fee in the region of a fraction of a percent up to a couple of percent of turnover, with the discount charge priced over a base rate — but figures vary widely with sector, volume and risk.

The faster your customers pay, the less the discount charge costs you, so the facility rewards a clean ledger. Watch for additional fees — set-up, minimums, audit and termination charges can all appear. Our fees guide explains how to read these.

Pros and cons

Invoice finance has clear strengths and equally clear limits. It is worth weighing both before committing.

Advantages:

• Releases cash tied up in the sales ledger, fast.
• Funding grows automatically with your turnover.
• Factoring can outsource credit control, freeing up time.
• Often available to younger businesses that lack a long borrowing history.

Drawbacks:

• It only works if you invoice other businesses on credit terms — no use for cash-on-delivery or consumer trades.
• Costs can add up if customers pay slowly.
• Factoring means customers interact with your financier.
• Some agreements lock you in for a minimum term.

If your cash is locked in stock or one-off gaps rather than invoices, a working capital facility or revolving line may suit better.

Is it right for your business?

Invoice finance fits best when you sell B2B on credit terms, have a reasonably reliable book of customers and your main problem is the wait to get paid. It is less suited to businesses that take payment up front, sell to consumers, or have a small number of very large invoices, where one disputed account can stall a chunk of your funding.

If your funding need is occasional rather than constant, a short-term facility you can draw and repay — without signing your whole ledger over — may be simpler. Credicorp lends to limited companies with no personal guarantee, which some directors prefer to a long invoice-finance contract. You can compare our business loans or register to apply. This guide is educational, not financial advice.