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Many UK small businesses struggle with cash flow when customers delay payments. According to the OECD, 41.8% of UK SMEs reported experiencing late payments. These gaps in working capital force firms to seek fast funding. Invoice financing is one solution: it allows you to access cash tied up in unpaid invoices, rather than waiting 30, 60, or 90 days for payment.
For context, invoice finance is a very popular solution – UK businesses used it to support roughly £313 billion of sales in 2023, and had about £21.2 billion outstanding in advances by end-2024. This shows how many SMEs turn to these facilities to bridge cash gaps.
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How invoice financing works
Invoice financing is essentially a short-term loan secured by your accounts receivable. In practice, a business assigns some or all of its unpaid invoices to a finance provider as collateral. The provider advances a large fraction of each invoice’s value, typically around 80–90%, almost immediately. (For example, if you invoice a customer for £10,000, you might get £8,000–£9,000 up front.) Once the customer eventually pays the invoice, the lender releases the remaining balance (minus fees) back to you. In effect, invoice finance bridges the cash flow gap between issuing an invoice and actually receiving payment.
Invoice factoring vs invoice discounting
Invoice finance comes in two main forms: factoring and invoice discounting. These work similarly but differ in who collects the payment and whether your customer knows about the financing.
Invoice factoring
With factoring, the finance provider buys your invoices and takes over the credit control. It will advance up to about 90% of each invoice’s value almost instantly. The factor then manages your sales ledger and collects payment directly from your customers. Your customers will know you’re using a factoring service, since they pay the finance company instead of you. This can greatly reduce your administrative burden – the factor handles chasing payments and checking new customer credit. Many SMEs opt for factoring precisely for this convenience.
Invoice discounting
With invoice discounting, the provider still advances around 80–90% of each invoice’s value, but you keep control of collecting payments. The arrangement is confidential (undisclosed), so your customers continue paying your business as normal. Essentially, discounting is a loan secured on the invoices, without the sales-ledger management that factoring includes. Because it’s “finance-only,” discounting typically has lower fees than factoring. In both cases, you repay the advance as invoices are settled.
Single invoice finance
Single invoice finance, also known as selective invoice finance or spot factoring, is a form of lending where a business will be able to release funds against one invoice. Unlike traditional invoice financing, you are not required to reveal your whole sales ledger, but instead use just one single invoice, which might be late or unpaid.
The benefit of this type of finance is that there are no long-term commitments or contracts, and a lender may release up to 95% of the invoice amount immediately.
Benefits of invoice financing
Invoice financing offers several advantages for SMEs needing faster working capital:
Quicker cash flow
By unlocking the value of invoices, you avoid long waits for customer payments. Instead of cash sitting idle, it’s released immediately for suppliers, staff or reinvestment. In practice, lenders often deposit funds within 24-48 hours of drawdown. This rapid cash boost can keep operations running smoothly, even when customers take longer to pay.
Flexible and scalable
Invoice finance is highly flexible. You choose which invoices to fund, and you only “repay” (the advance plus fees) when those invoices are paid. There are no fixed monthly repayments, and the facility automatically scales with your sales. In other words, when your turnover grows (for example, by winning a big new client), the available finance increases in real time. This makes invoice finance ideal for seasonal businesses or firms experiencing rapid growth, since the borrowing capacity grows as you issue more invoices.
Uses your existing asset
Invoice finance leverages an asset you already have – accounts receivable – rather than requiring new collateral. You typically don’t need to pledge property or equipment; the invoices themselves serve as the security. This is a major advantage for companies without expensive fixed assets. It also preserves ownership: invoice financing is debt (not equity), so you keep full control of your business. Even younger companies with limited history can often qualify if their customers are creditworthy, since the focus is on the quality of the invoices.
Reduced admin (factoring)
If you use factoring, the provider handles your sales ledger and collections. This saves you time and effort. Invoice finance specialists effectively act as outsourced credit-control staff, following up late payments on your behalf. That expertise can improve efficiency and free you to focus on running the business.
Considerations of invoice financing
Invoice financing isn’t a cure-all. Some potential drawbacks include:
Higher cost
Invoice finance usually costs more than a regular bank loan. Providers charge a service fee (a percentage of each invoice) and a discount charge (like interest) on the funds advanced. The combined annual cost can be relatively high, especially for smaller businesses. It’s important to compare providers carefully: check the fee structure, interest rate and any setup costs to understand the total cost of financing.
Reliance on customers
Since repayment depends on customer payments, you remain ultimately responsible if a client defaults. Most agreements include a guarantee clause: if the customer doesn’t pay, you must cover the advance. If a large debtor goes insolvent, you may have to repay the lender for that invoice. Some lenders offer limited “non-recourse” bad-debt cover (at a higher cost), but in general, invoice finance smooths cash timing without eliminating credit risk.
Customer perception (factoring)
Because factoring involves a third party collecting payments, your customers will know it’s in place. Some businesses worry this might signal cash problems or affect relationships. Invoice discounting avoids this by being confidential. You should consider whether visibility matters in your industry when choosing between factoring and discounting.
Eligibility
Invoice finance is primarily for B2B firms. Lenders typically require your customers to be with other businesses on credit terms. If you sell mainly to cash-paying consumers or the public sector, options may be limited. Providers also expect a minimum trading history and clear accounts, since they assess the strength of your debtor book. Very small businesses (e.g. turnover under ~£300,000) may not qualify for standard facilities; in such cases, lenders may offer spot or selective factoring to finance individual invoices.
Getting started
Invoice financing can be a powerful cashflow tool, but it’s one of several options. For example, a traditional short-term business loan or other cashflow funding facility could also cover gaps, though loans usually require more collateral and strict checks. The key difference is that invoice finance repays itself as customers pay, so it adds no extra fixed monthly debt beyond your receivables.
Before deciding, compare quotes from multiple providers and review all terms. Improving your invoicing and credit-control processes (e.g. sending invoices promptly, following up on late payments) will also help. Rise Funding’s guides, such as our article on late payment of invoices, offer further tips on managing cash flow. By understanding the costs and benefits, you can decide if invoice financing is the right fit to help your SME stay funded and grow.
To discuss your options, whether it be a business loan, cashflow funding or others, you can call one of Rise Funding’s experts for individualised advice. Contact us through the form below, or get an instant business quote by completing our online questionnaire.
