Late-paying customers tie up cash that growing businesses need for wages, stock and tax. Invoice finance releases funds against unpaid invoices, and it comes in two main forms: factoring and invoice discounting. They share a mechanism but differ in who runs the sales ledger.
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Higher-for-longer borrowing costs make working capital more expensive, which is one reason more firms compare invoice finance with overdrafts and term loans.
How invoice factoring works
With factoring, the provider advances a percentage of each invoice, often 80–90%, and also manages the sales ledger and credit control. Customers are usually told to pay the factor directly. The balance, less fees, is released once the invoice is paid. It suits smaller or fast-growing businesses without a dedicated credit control function.
How invoice discounting works
With invoice discounting, you keep control of the ledger and collect payments yourself, so the arrangement can be confidential and customers need not know. Providers typically want evidence of sound credit control and a minimum turnover, so it tends to suit more established firms.
Comparing the two
- Control: factoring outsources collections; discounting leaves them with you.
- Confidentiality: discounting is usually confidential; factoring is not.
- Cost: pricing comprises a discount charge on funds drawn plus a service fee, which is generally higher for factoring because of the added service.
- Eligibility: providers look at customer quality, concentration and dilution, as well as the business itself.
Whole turnover or selective?
Some facilities require all invoices to be assigned, while selective or spot arrangements allow individual invoices to be financed. Selective products offer flexibility but can cost more per invoice. Contract terms, minimum periods and exit notice should be read carefully.
Alternatives to consider
Invoice finance is not the only option. Term lending, asset-backed borrowing or a business loan may fit better where cash needs are not tied to debtor days. Our overview of corporate banking and company loans covers those routes, and our 2026 working capital guide to invoice factoring sets out how funding is typically structured and what providers ask for.
Questions to ask providers
- What are the discount rate, service fee and any minimum charges?
- Are there termination fees or minimum terms?
- How are disputed or concentrated invoices handled?
- Is recourse applicable if a customer fails to pay?
Our commercial and corporate banking hub brings together guides to business funding options.
Frequently asked questions
Will my customers know I use invoice finance?
With factoring, usually yes, as they pay the factor. With confidential invoice discounting, they typically do not, although you remain responsible for collections.
How much can I draw?
Advance rates commonly start around 80% of eligible invoices and can go higher depending on the debtor book, though ineligible or aged invoices may be excluded.
Can start-ups use invoice finance?
Some providers work with young businesses that invoice other businesses on credit terms, but pricing and security requirements are often tighter.
Is a personal guarantee required?
Some facilities require a director’s guarantee or a warranty. Read how any guarantee operates, and take legal advice if unsure.
Speak to a broker
We can compare providers and facility types through our invoice factoring service. Contact us or call 02080882211.
Business finance is largely unregulated by the FCA. Facilities may be secured against business assets or personal guarantees, so ensure you understand the obligations before proceeding.
Giles Finance is a trading style of Giles Finance & Consultancy Services, authorised and regulated by the Financial Conduct Authority (FRN 726857).