It is a way to borrow money for your business, using the value of your unpaid invoices as collateral.

How does invoice finance work?

An invoice finance lender effectively buys an unpaid invoice from your business, paying you some of the money upfront and the rest when the invoice is paid by your customer.

In exchange the lender usually retains part of the invoice value. The pros and cons of invoice finance are:

  • You repay as your business earns

  • Bad credit considered

  • You don't have to chase payments

  • Charges can be high

  • May be harder to get other finance

  • Payments taken from customers

How to get the right invoice finance

Start by choosing the type of invoice funding that best suits your business. The two most common options are:

  1. 1.

    Invoice discounting where the lender pays you the money on your invoice and you repay them once your invoice is paid to you by your customer.

  2. 2.

    Invoice factoring where the lender buys your outstanding invoice from you and then collects payment from your customers.

Some invoice financing companies offer other specialist forms of invoice financing, including:

  • Export financing, for businesses that export overseas

  • Recruitment financing, for businesses that operate in the recruitment sector

  • Construction financing, for business in the construction sector

If your business trades in any of these areas or sectors, check if these types of working capital finance will better suit your needs.

Choose how much of the invoice you need to release

When you enter into an invoice finance agreement, the lender will release a set percentage of the invoice value to you upfront - usually up to 85-90% of its value.

The rest is then released to you once it has been paid by your customer.

You can usually choose the upfront percentage, but it may cost you more to release a higher amount and the maximum percentage varies between lenders.

Invoice finance example

You have an outstanding invoice that totals 100,000.

You choose an invoice discount finance option that will release 90% of the invoice upfront and charges a 2% fee.

90,000 is paid to your business once your finance application is approved, and another 8,000 once your customer pays the invoice. A 2,000 fee is retained by the lender.

Compare the costs

Once you know which type of invoice finance is right for your business you need to look for the cheapest solution on the market.

There are usually two main costs to your business:

  1. Fees for setting up your invoice finance arrangement with the lender

  2. Interest charges on each invoice you finance

Exactly how much your business will have to pay depends on lots of different factors, including your business turnover, credit record and the value of your business assets.

You can use this comparison to find invoice funding companies and visit their websites to check potential charges.

Invoice finance FAQs

Q

Who is responsible for collecting the invoice payments?

A

This depends on the type of invoice finance you choose. With invoice discounting you collect the money, with factoring you pay the lender to do it.

Q

Can I borrow if my business has bad credit?

A

Yes, some lenders will consider your application if you have had credit issues in the past, but it may be more expensive.

Q

Will my customers know if I choose factoring financing?

A

Yes, in most cases your customers will know you are using a factoring company to collect the money owed to your business.

Q

How long will I need to have been trading?

A

Most invoice factoring companies ask for at least 12 months of accounts when you apply, but some will accept less than this.

Q

Can I apply for invoice finance in my own name?

A

To be eligible to apply, you usually need to be the owner of the company or a registered company director.

Q

Is it cheaper to get a peer to peer business loan?

A

P2P business loans can offer lower rates, but you cannot use your unpaid invoices as collateral when applying. You can compare P2P loans here.

Q

Do I need a business account to apply for invoice finance?

A

Some lenders require you to have a business account with them to qualify for a business loan, but some may be more flexible so ask before you apply.

Q

What is LIBOR?

A

The London Interbank Offered Rate (LIBOR) is the reference rate businesses use to borrow money from each other. Some fees are based on the LIBOR.

About our comparison

Q

Who do we include in this comparison?

A

We include invoice finance available from lenders and through brokers on our panel. Here is more information about how our website works.

Q

How do we make money from our comparison?

A

We have commercial agreements with some of the companies in this comparison and get paid commission if we help you take out one of their products or services. Find out more here.

You do not pay any extra and the deal you get is not affected.