What invoice finance is
Invoice finance lets you borrow against the money your customers already owe you. Instead of waiting for an invoice to be paid, a lender advances you most of its value straight away, then settles up when your customer pays. Here's how it works:
- You do the work and invoice your customer as normal
- The lender advances a large share of the invoice value, often around 80 percent, usually within a day or two
- Your customer pays the invoice on their normal terms
- You receive the remaining balance, less the lender's fees
The key difference from a standard business loan is that the facility is tied to your sales. As you invoice more, the amount you can draw grows with it. You're not borrowing a lump sum and repaying it over years. You're bringing forward money that's already yours.
Factoring vs invoice discounting
You'll hear two terms used, and the difference matters to how your customers experience it:
- Invoice factoring: the lender manages collection, and your customers pay the lender directly. Your customers will know a finance company is involved. It can suit smaller businesses that would rather not chase payments themselves.
- Invoice discounting: you keep collecting from your customers as usual, and the arrangement is usually confidential. It typically suits larger, more established businesses with good systems and a solid debtor ledger.
Some lenders also offer selective or single-invoice options, where you finance one large invoice rather than your whole ledger. That can work well for a one-off big job.
Who it suits
Invoice finance works for businesses that invoice other businesses on credit terms. It's common in:
- Labour hire and recruitment, where wages go out weekly but clients pay monthly
- Transport and logistics, carrying fuel and wage costs ahead of payment
- IT, consulting and professional services billing larger clients on 30 to 60 day terms
- Wholesale, distribution and manufacturing, where stock is paid for well before customers pay
- Trade and service businesses working for commercial or government customers
The common thread is creditworthy customers who pay reliably, just slowly.
Growing fast? Rapid growth is one of the most common reasons businesses run short of cash. Every new contract means more work paid for upfront and more money tied up in invoices. Because invoice finance grows with your sales, it often suits growth better than a fixed loan.
What it costs
Pricing varies between lenders, but most invoice finance is made up of two parts:
- A discount or interest charge on the money you've drawn, for the time the invoice is outstanding
- A service or administration fee, often a percentage of the invoices you put through or a set monthly amount
Because you only pay while invoices are outstanding, the real cost depends on how quickly your customers pay. The fair way to judge it is against what the cash is worth to your business: taking on a contract you'd otherwise have to turn down, paying a supplier early for a discount, or avoiding IRD penalties. We'll lay the full cost out in plain dollars before you commit to anything.
What lenders look at
Invoice finance is assessed differently from most business lending. The quality of your customers matters as much as your own business. Lenders typically look at:
- Who owes you: established businesses and government agencies are viewed far more favourably than small or new customers
- Concentration: if one customer makes up most of your ledger, a lender may limit how much they'll advance against that customer
- How old your invoices are: invoices well past due are usually excluded
- Disputes and credit notes: a history of disputed invoices reduces what can be financed
- Progress claims and retentions: common in construction, and often treated differently or excluded
- Your records: up to date invoicing in accounting software makes the whole process much smoother
Check your existing security first: if your bank or another lender already holds a general security agreement over your business, it usually covers your debtors too. An invoice finance lender will need that sorted, typically with your existing lender's agreement. It's worth checking before you apply, and it's one of the first things we look at.
Invoice finance vs a business loan or line of credit
- Invoice finance: funding linked to your unpaid invoices. It grows as you sell more and suits businesses with slow-paying commercial customers.
- Unsecured business loan: a lump sum repaid over a set term. It suits a specific purchase, project or one-off cost.
- Line of credit: a limit you draw on and repay as needed, assessed mainly on your trading and bank statements rather than your invoices.
Plenty of businesses use more than one. The right mix depends on what's causing the cash pressure. If you'd like to compare the last two, our guide to business loans vs lines of credit goes into more detail.
When it's not the right fit
Invoice finance probably isn't the answer if:
- Most of your sales are to consumers or paid in cash or by card on the day
- Your customers already pay within a week or two
- Much of your work is progress claims with retentions
- Your invoices are regularly disputed or credited
In those cases a business loan or line of credit is usually a better match, and we'll tell you so.
How Fundme helps
We start with your debtor ledger and bank statements, work out whether invoice finance fits or whether another product would serve you better, and approach the lenders whose criteria match your customers and industry. We explain the costs in plain terms, help sort out any existing security, and stay with you through setup. Setup is usually a matter of weeks rather than months, and once it's running, funding against new invoices is typically available within a day or two.