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Guide

Invoice finance explained

Where cash is tied up in business-to-business invoices, an invoice finance provider may consider advancing part of eligible invoices before the customer pays.

How it works

  • You raise an invoice to a business customer as normal.
  • The funder assesses it and may advance an agreed percentage on its stated timetable.
  • Your customer pays the invoice on their usual terms.
  • The funder releases the remaining balance, minus its fees.

Because the facility grows with your sales ledger, it tends to fit growing businesses better than a fixed term loan does.

Factoring vs invoice discounting

  • Factoring — the funder runs credit control and chases payment. Less admin for you, but your customers know a funder is involved.
  • Confidential invoice discounting — you keep collections and the arrangement stays private. Usually needs stronger systems and a larger, established ledger.
  • Selective or spot factoring — fund individual invoices rather than the whole ledger, useful for one-off cash gaps.

What it costs

Two charges usually apply: a service fee on turnover for running the facility, and a discount charge on the money actually drawn. Compare the total annual cost against the working capital released — a facility that costs more but lets you take on larger contracts may still support a commercial objective. This is a matter for the company and its advisers.

What to check in the contract

  • Minimum term and notice period — some agreements run 12–24 months with a long exit notice.
  • Minimum fees payable regardless of usage.
  • Recourse — whether you repay the advance if your customer never pays, and how long you have.
  • Concentration limits — caps on how much of the facility one customer can represent.
  • Debtor approval — which of your customers the funder will actually fund.

Common questions

What is invoice finance?
A provider may advance an agreed percentage of eligible unpaid invoices and release any remaining balance, less charges, after the customer pays. The percentage and timing are provider-specific.
What is the difference between factoring and invoice discounting?
With factoring, the funder manages collections and your customers know they are involved. With confidential invoice discounting you keep credit control and the arrangement stays private.
What does invoice finance cost?
Providers may charge a service fee and a separate charge on funds drawn. The structure and total cost depend on the facility, turnover, debtor spread, payment timing and provider terms.
Who does invoice finance suit?
Businesses that invoice other businesses on credit terms — recruitment, construction services, wholesale, manufacturing and logistics. It does not suit retail or consumer sales paid at point of purchase.

Tell us what your company needs to fund

Backed may introduce your company to one or more funding partners whose criteria may fit. Providers determine eligibility, approval, pricing and terms.

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