Invoice finance: factoring, discounting and selective finance

How invoice finance works

You sell to another business on credit and raise an invoice. The customer has 30, 60 or 90 days to pay. You send a copy of the invoice to the funder, which pays you an agreed percentage of its value, called the advance, within the terms of your agreement. When the customer pays, the funder takes back what it advanced plus its charges and releases the rest to you.

Behind each advance is an assignment. Your unpaid invoices are sold or assigned to the funder, and the agreement gives it security over them and, in most facilities, a debenture over the company as well. The money you can draw at any moment is called availability: the advance percentage applied to the invoices the funder accepts, less what you have already drawn.

Charges come in two parts. A discount charge works like interest: a rate over a reference rate, charged on the money you have drawn for the days it is out. A service fee pays for running the facility and, with factoring, for the credit control. It is charged as a percentage of the invoices you put through or as a fixed monthly sum. Some facilities add fees for audits, for setting up, for bad debt protection and for leaving.

Invoice finance works only for invoices to other businesses. Sales to consumers, cash sales and card sales cannot be funded this way. It suits a business that waits weeks or months to be paid by creditworthy business customers and is growing, so that the gap between doing the work and being paid keeps getting bigger.

The three forms of invoice finance

Invoice factoring

The funder buys your sales ledger, chases your customers and collects the money. Your customers know and pay the funder. It suits smaller businesses without a credit controller.

Invoice discounting

You keep your credit control and your customers keep paying you, into an account the funder controls. It can be confidential. Funders look for larger, established businesses with good collection records.

Selective invoice finance

You choose single invoices or single customers to fund, as and when you need cash. You pay per invoice and sign up to no whole-ledger facility.

What one invoice costs to fund

Illustrative example

A £20,000 invoice to a business customer on 60-day terms, paid on the due date. The advance, the rate and the fee are assumptions for the arithmetic: each funder sets its own.

Advance paid to you at an assumed 85%: £17,000.00
Discount charge on £17,000 for 60 days at an assumed 9% a year: £251.51
Service fee at an assumed 1% of the invoice: £200.00
Balance released to you when the customer pays: £2,548.49
Total cost of funding the invoice: £451.51

That is 2.26% of the invoice value, for having £17,000 two months early. If the customer pays 30 days late, the discount charge rises with the days outstanding while the service fee stays the same. The invoice finance calculator runs the same sum on your own figures.

A warehouse worker moving stock with a pallet truck between racking

What the funder checks on your sales ledger

An invoice finance funder lends against your customers’ ability and willingness to pay, so it reads your sales ledger before it reads your accounts. It wants an aged debtors list, copies of invoices and contracts, your terms of trade and proof that the goods were delivered or the work done.

It looks at who your customers are and how creditworthy they are, and at concentration: if one customer owes 40% of your ledger, the funder may cap how much it will advance against that customer. Invoices more than a set number of days past due drop out of availability. So do disputed invoices, invoices to customers who are also your suppliers, where they can set off what you owe them, and invoices raised before the work is done.

Construction and contract businesses face extra questions. Stage payments, applications for payment and retentions are harder to fund than a plain invoice for delivered goods, because the customer can dispute or set off the amount. Some funders specialise in these ledgers and some will not fund them.

Factoring, discounting and selective finance

	Factoring	Invoice discounting	Selective finance
Who chases your customers	The funder	You	You, or the funder for the invoices funded
Do your customers know?	Yes: they pay the funder	Can be kept confidential	Depends on the funder
Which invoices	The whole sales ledger	The whole sales ledger	The invoices you choose
How you are charged	Service fee on turnover plus a discount charge	Lower service fee plus a discount charge	A fee per invoice
Commitment	Minimum term and notice period	Minimum term and notice period	Per invoice

Each can be with or without recourse. With recourse, you repay the funder if a customer does not pay. Without recourse, the funder carries the bad debt for approved customers up to an agreed limit and charges more for that cover.

Contracts that ban assignment

Some customer contracts say you cannot assign the money they owe you. For contracts entered into on or after 31 December 2018, the Business Contract Terms (Assignment of Receivables) Regulations 2018 make such a term of no effect, so a funder can take an assignment of the invoice anyway. The rule does not apply if your business is a large enterprise or a special purpose vehicle, or to the contracts excluded by the regulations, so a funder will still read the terms of your biggest contracts.

Under section 136 of the Law of Property Act 1925, an assignment of a debt takes effect in law once the debtor has been given express notice in writing. That is why a factoring company writes to your customers and puts its own bank details on your invoices. Confidential invoice discounting works without that notice, which is one reason funders set tighter conditions on it.

Who invoice finance suits

It suits a limited company or LLP selling to other businesses on credit, with a spread of creditworthy customers, clean paperwork and a reason the gap between invoice and payment is costing it work: a growing order book, a large customer on long terms, a seasonal peak in invoicing. Recruitment agencies, wholesalers, manufacturers, haulage firms and business service companies fit that pattern, because their costs go out weekly and their customers pay monthly or slower.

It suits a business less well if its customers are consumers, if a large part of its sales go to one customer, if its invoices are often disputed, or if it bills in advance for work not yet done. A facility also makes your customers part of your borrowing: a customer that slows down its payments reduces the cash you can draw at the moment you need it most.

Invoice finance can be backed by the government’s Growth Guarantee Scheme where the funder uses it. The funding search is for limited companies and LLPs, and for sole traders and partnerships borrowing more than £25,000.

Invoice finance cost calculator

The cash an invoice finance facility releases and its total cost for a year, with the service fee on turnover included.

Open the calculator

Questions people ask

What is the difference between factoring and invoice discounting?

With factoring, the funder runs your credit control: it chases your customers, they know about the arrangement and they pay the funder. With invoice discounting, you keep credit control, your customers keep dealing with you, and the arrangement can be confidential. Funders offer discounting to larger, established businesses with good collection records, and it costs less because the funder does less of the work.

How much can I borrow with invoice finance?

You can draw an agreed percentage of the invoices the funder accepts, less what you have already drawn. The percentage is set by each funder for each business, after reading your ledger. Invoices that are overdue past a set point, disputed, owed by a customer who is also your supplier, or above a concentration limit for one customer are left out, so availability is lower than the face value of your ledger.

Will my customers know I use invoice finance?

With factoring, yes: the funder writes to them, its bank details go on your invoices and its team chases payment. With confidential invoice discounting, they do not, because you keep collecting and they keep paying into an account in your name that the funder controls. Selective finance can go either way, depending on the funder.

Is invoice finance a loan?

It is funding secured on your invoices. Legally the invoices are sold or assigned to the funder, which then advances you part of their value, and the funder will register a charge over the company at Companies House. Your accountant decides how it shows in your accounts. The cost is the discount charge on money drawn plus the service fee and any other fees in the agreement.

Can I get invoice finance as a sole trader?

Funders do provide invoice finance to sole traders and partnerships. Through the funding search here, it is available to sole traders and partnerships borrowing more than £25,000, and to limited companies and LLPs. Smaller unincorporated borrowers should speak to their own bank or look at the government’s Start Up Loans scheme.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

Invoice finance

How invoice finance works

The three forms of invoice finance

Invoice factoring

Invoice discounting

Selective invoice finance

What one invoice costs to fund

What the funder checks on your sales ledger

Factoring, discounting and selective finance

Contracts that ban assignment

Who invoice finance suits

Invoice finance cost calculator

Questions people ask

Working capital

Invoice factoring

Invoice discounting

Selective invoice finance

Working capital finance

Invoice finance

How invoice finance works

The three forms of invoice finance

Invoice factoring

Invoice discounting

Selective invoice finance

What one invoice costs to fund

What the funder checks on your sales ledger

Factoring, discounting and selective finance

Contracts that ban assignment

Who invoice finance suits

Invoice finance cost calculator

Questions people ask

Working capital

Invoice factoring

Invoice discounting

Selective invoice finance

Working capital finance

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