Every small business knows the pain of having cash tied up in unpaid invoices. But what if there was a way to access that money without waiting 30, 60, or 90 days for a client to pay?
According to the Office of the Small Business Commissioner (OSBC), late payments affect an estimated 1.5 million UK businesses each year, while businesses are owed around £26 billion in late payments at any given time.[1]
Invoice finance provides a practical solution to this problem. Instead of waiting weeks or months for an invoice to clear, options like invoice discounting and factoring allow you to keep the lights on, pay your staff, and plan for growth, even when customers don’t pay on time.
What Is Invoice Finance?
Invoice finance is a quick way to unlock cash against your business’s unpaid invoices. If your cash flow is disrupted, a financial provider can lend you a portion of the value right away (usually 80-90% or more) while you wait for your customer to pay.
Invoice finance is generally used as an umbrella term for:
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Invoice factoring
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Invoice discounting
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Selective invoice finance
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Spot factoring
Although terminology can vary between providers, invoice finance facilities have important distinctions, which we’ll cover in this article.
How Does Invoice Finance Work?
Invoice finance is a straightforward process that’s usually fast and easy.
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You sell goods or services to a client or customer.
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You share a copy of the bill with an invoice finance provider.
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The provider pays you a large share of the money (up to 90% or more).
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The client pays the amount quoted on the invoice to you or your finance provider, depending on your arrangement.
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The provider gives you any leftover cash minus their service fee.
If you want to know more, you can read our guide on how invoice financing works.
Different Types of Invoice Financing for Small Businesses
There are four main types of invoice financing for small businesses: invoice discounting, invoice factoring, selective invoice financing, and spot factoring.
Invoice Discounting
Invoice discounting is a financial arrangement in which your business borrows money against its unpaid customer invoices. A provider will advance 80-90% of the invoice value, usually within 24 hours, and you’ll pay them back (plus a small fee) once your customer pays.
One of the benefits of invoice discounting is that it remains confidential. Your customers still pay into your company bank account, unaware that a third party is involved, and you maintain complete control of the client relationship. The only main drawback is that you remain responsible for chasing the payment.
Invoice Factoring
Invoice factoring is slightly different from discounting because the provider typically manages your sales ledger and collects payments from your customers. In this scenario, your customers will typically pay the finance provider directly, who will give you the rest of your money back, minus a small fee.
This option works well for small to medium businesses that don’t have a dedicated accounts team and want to outsource their credit control. The downside is that your customer knows you have involved a third party to recover the unpaid invoice, and fees are usually higher than with invoice discounting.
Selective Invoice Finance & Spot Factoring
Under a standard invoice discounting or factoring contract, your company will need to hand over some or all of your sales ledger to the finance provider. This means you can’t pick and choose to send only your slowest-paying or largest client accounts to avoid additional fees.
With selective invoice financing or spot factoring, you only hand over the invoices you choose. Selective invoice finance and spot factoring are related forms of invoice finance, but they aren’t necessarily identical. Selective finance can allow businesses to choose particular customer accounts, while spot factoring can allow individual invoices to be financed.
The upside of selective financing or spot factoring is that you can just use the service when your cash flow needs a boost. The downside is that fees can be slightly higher than discounting or factoring.
Invoice Finance Options Compared
| Features | Invoice Factoring | Invoice Discounting | Selective Invoice/Spot Factoring |
|---|---|---|---|
| Which invoices? | Some or all of your sales ledger | Some or all of your sales ledger | Only specific invoices you choose |
| Do your customers know? | Yes. The provider contacts them directly | No. It is confidential | Can be confidential or visible |
| Who collects payments? | The finance provider | Your team | Your team (usually) |
| How long is the contract? | Longer term (12-24 months) | Longer term (12-24 months) | Short-term/pay-as-you-go |
| How are fees charged? | Monthly fees on eligible sales | Monthly fees on eligible sales | Higher one-off fees per funded invoice |
| Best suited for... | SMEs with no dedicated finance team | Businesses with an in-house team | Businesses needing occasional cash |
Invoice Finance for UK Businesses: Am I Eligible?
Invoice finance is normally available to businesses that sell goods or services to other businesses on credit terms. Providers will typically assess your trading history, outstanding invoices, and the creditworthiness of your customers. Eligibility requirements vary between providers, so there is no universal minimum trading period.
The British Business Bank specifically advises that invoice finance should not be a substitute for profitability.[2] While it can help businesses manage short-term cash-flow pressures, it cannot solve underlying financial problems, and the amount of funding available can fall if turnover decreases.
To explore your eligibility, you can compare invoice finance quotes or contact one of our invoice financing experts.
Are There Risks Involved with Invoice Financing?
While invoice financing can provide businesses with quicker access to working capital, it also carries some risks.
Financial Risks
If a customer fails to pay their invoice, your business typically remains responsible for repaying the finance provider. The exact risks of invoice finance depend on the provider and agreement, particularly whether the arrangement is with recourse or without recourse.
There are additional costs to consider, including service fees, interest or discount charges, and exit fees. These costs can reduce the overall benefit of using invoice finance, particularly for businesses with tight profit margins.
Operational and Relationship Risks
With invoice factoring, the finance provider takes responsibility for collecting payments from customers, which can affect the way you manage your customer relationships.
Invoice finance agreements can include contractual restrictions, such as minimum terms, notice periods, and limits on the amount that can be financed against individual customers, which could affect the day-to-day operations of your business.
Cash Flow Dependency Risks
Relying too heavily on invoice finance can create problems if sales fall or customers take longer to pay. Small businesses in particular should carefully assess the costs, terms, and level of risk involved before choosing an invoice financing facility.
| Type of Invoice Finance | Main Risks |
|---|---|
| Invoice Financing | Cost of finance, customer non-payment (with recourse), long-term contractual commitments, becoming over-reliant on the facility. |
| Invoice Factoring | Customer relationship risks, costs, loss of control over collections, customer non-payment (with recourse). |
| Selective Invoice/Spot Factoring | Higher costs per invoice, limited availability, customer perception, customer non-payment. |
Invoice Finance: With or Without Recourse?
This refers to who takes the risk if your customer doesn’t pay the invoice.
With recourse: Your business retains the risk. If you receive an advance from the finance provider and your customer doesn’t pay, you may have to repay the provider or replace the invoice with another eligible invoice. This is the most common arrangement.
Without recourse: The finance provider takes on some or all of the customer credit risk. If the customer fails to pay because of insolvency or another covered reason, you generally don’t have to repay the advance. However, there are usually exclusions, and the provider may charge more for this protection.
For example, if you issue a £10,000 invoice and the finance provider advances you £8,000…
With recourse: If the customer doesn’t pay, you may have to repay the £8,000.
Without recourse: If the customer becomes insolvent and the non-payment is covered by the agreement, then the finance provider generally absorbs the loss.
Is Invoice Finance Right for My Business?
Invoice finance is a good option for many UK businesses. It is usually a fast and straightforward way to help you manage your working capital, cover expenses, and take advantage of growth opportunities.
The costs, terms, and risks of invoice finance vary between providers and facilities. When comparing options, you should consider your business’s cash flow needs, customer payment behaviour, and how much you want to rely on external funding.
The right invoice finance provider should provide useful cash-flow support while aligning with your business’s wider financial plans.
Stop Waiting 60 Days for Your Cash
Winning a major logistics contract shouldn’t punish your bank account. If Net 60 or Net 90 terms are destroying your working capital, invoice finance fixes the timeline instantly.
Compare real quotes from FCA-regulated providers and unlock the cash tied up in your accounts receivable today.
Invoice Finance FAQs
Is invoice finance a loan?
Not in the typical sense. Invoice finance is generally secured against outstanding invoices rather than being a traditional business loan. However, the exact structure and repayment obligations depend on the type of facility and provider.
What’s the difference between invoice discounting and invoice factoring?
The main difference is who recovers the unpaid invoice from the customer. With invoice financing, the business will often retain control of collecting payment from customers. With factoring, the finance provider typically takes responsibility for credit control and collecting invoices.
Is invoice finance expensive?
Invoice finance has a cost, but whether it is expensive depends on the facility and provider. Costs can include service fees, discount or interest charges, and other fees. Businesses should compare the total cost of funding with the cash-flow benefits it provides.
Are there risks involved with invoice finance?
Yes. The main risks include the cost of finance, customer non-payment, contractual commitments, and becoming overly reliant on the facility. With factoring, businesses should also consider the potential impact on customer relationships and control over collections.
What happens if my customer doesn’t pay?
This depends on whether the facility is with or without recourse. With recourse, the business may remain responsible for an unpaid invoice. With non-recourse finance, the provider may take on some of the risk of customer non-payment, subject to the terms of the agreement.
References
[1] Small Business Commissioner, “Late Payments Research 2025.” Retrieved 2026 from: https://www.smallbusinesscommissioner.gov.uk/late-payments-research-2
[2] The British Business Bank, “Invoice finance.” Retrieved 2026 from: https://www.british-business-bank.co.uk/business-guidance/guidance-articles/finance/invoice-finance
