Guide
How Invoice Finance Works
A step-by-step guide to invoice finance in the UK. Learn how businesses unlock cash from unpaid invoices, what lenders look for, typical costs and advance rates, and how the process works from application to funding.
Spark Intel Research Team
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Published: March 2026
What Is Invoice Finance?
Invoice finance is a form of business funding where a company borrows money against the value of its unpaid invoices. Instead of waiting for customers to pay - which can take 30 to 90 days or longer - the business receives an advance from a finance provider, typically within 24 to 48 hours.
The finance provider advances a percentage of each invoice (usually 70% to 90%), and when the customer pays, the remaining balance is released minus the provider's fees.
Invoice finance is one of the most widely used forms of business funding in the UK. It is particularly common among businesses that trade on credit terms and need to manage cash flow between raising invoices and receiving payment.
The Invoice Finance Process: Step by Step
You raise an invoice
You deliver goods or services to your customer and raise an invoice with agreed payment terms - for example, 30 days net.
You submit the invoice to your provider
The invoice details are sent to the finance provider - either manually or automatically through an integrated platform. The provider verifies the invoice and checks it against your facility terms.
You receive an advance
The provider advances a percentage of the invoice value - typically 70% to 90% - into your bank account, usually within 24 hours. This is the cash you can use immediately.
Your customer pays
When the invoice reaches its due date, your customer pays. Depending on the arrangement, they pay either into a trust account controlled by the provider (factoring) or into your own bank account (invoice discounting).
The balance is released
Once the customer has paid in full, the provider releases the remaining balance to you - minus the service charge and discount charge (interest on the advance).
Types of Invoice Finance
Invoice finance is an umbrella term covering several product variants:
Factoring
The provider manages credit control and collects payment from your customers directly. Your customers are aware of the arrangement.
Invoice Discounting
You retain credit control and manage collections yourself. Customers are typically unaware of the arrangement (confidential).
Selective Invoice Finance
You choose which invoices to fund rather than assigning the whole ledger. Useful for occasional cash flow gaps rather than ongoing facility needs.
Asset-Based Lending (ABL)
A broader facility that combines invoice finance with lending against other assets such as stock, plant, or property. Common for larger businesses.
For a detailed comparison of the two main types, see Invoice Finance vs Factoring.
What Does Invoice Finance Cost?
Invoice finance costs are typically made up of two components:
- Service charge - a percentage of your turnover (typically 0.2% to 3.0%) that covers the provider's administration, credit management (in factoring), and platform costs
- Discount charge - interest on the money advanced, usually calculated daily at a margin over base rate (commonly 1.5% to 3.0% over Bank of England base rate)
For a business with £1 million annual turnover, typical annual costs might range from £15,000 to £40,000 depending on the product type, advance rate, and debtor quality. Larger facilities with lower risk profiles typically achieve better rates.
Use the Invoice Finance Calculator to estimate costs for your business.
What Lenders Look For
Invoice finance providers assess several factors when evaluating an application:
- Debtor quality - who are your customers? Lenders prefer businesses that invoice creditworthy commercial customers rather than consumers
- Concentration risk - is your turnover spread across multiple customers, or are you dependent on one or two large debtors?
- Trading history - most providers prefer businesses with at least 6 to 12 months of trading, though some will consider start-ups
- Invoice terms - standard 30- or 60-day terms are easiest to fund; very long terms or retentions can be problematic
- Sector - some sectors are considered higher risk (construction with stage payments, for example); specialist providers exist for these
- Credit control history - for invoice discounting, lenders want to see that you manage your ledger well and collect on time
How Invoice Finance Is Recorded at Companies House
When a business enters an invoice finance arrangement, the lender typically registers a charge (debenture) at Companies House. This is a legal filing that records the lender's security interest over the company's assets - usually its book debts (receivables).
These charge registrations are the basis of Spark Intel's research. By tracking new debenture filings that relate to invoice finance, we can monitor market activity, identify which lenders are most active, and measure trends across sectors and regions.
For the latest market data, see the monthly invoice finance reports.
Advantages and Disadvantages
Advantages
- ✓ Improves cash flow without taking on traditional debt
- ✓ Funding grows with your turnover - no need to renegotiate as you scale
- ✓ Faster to arrange than a bank loan (typically 2 to 4 weeks)
- ✓ Credit control support (with factoring)
- ✓ Bad debt protection available (non-recourse options)
Disadvantages
- ✗ Can be more expensive than a traditional overdraft for low-risk businesses
- ✗ Contractual lock-in periods are common (12 to 24 months)
- ✗ Customer notification required with factoring (may affect perception)
- ✗ Not suitable for businesses that invoice consumers (B2C)
- ✗ Concentration limits may restrict funding if you rely on few customers
Ready to explore invoice finance?
Spark Finance can help you find the right facility for your business - compare lenders, rates, and terms in one place.
Apply Now