Invoice finance advances you most of an invoice's value as soon as you raise it, instead of waiting 30, 60 or 90 days to be paid. For a business whose growth is limited by the gap between doing the work and banking the money, it can be the difference between taking a contract and turning it down.
The two charges, and why they mislead
There is a service fee, charged as a percentage of turnover for running the facility, and a discount charge on the funds advanced, which behaves like interest. Quoted separately — "one and a half percent, plus eight percent" — they sound modest.
Combined, and annualised against the money you actually draw rather than the invoice face value, they are frequently more than a comparable business loan. That is not an argument against invoice finance; it is an argument for knowing the number before you sign.
Read the terms before the rate
The headline percentage decides less than people think. What decides the real cost is the small print: which invoices qualify at all, whether overseas or concentrated debtors are excluded, and whether the facility is recourse or non-recourse — meaning who carries an invoice that never gets paid.
The three clauses worth finding before you sign: the minimum term, the notice period, and the minimum monthly fee. A facility you use less than expected can cost more than the rate suggests.
Common questions
What is the difference between factoring and discounting?
With factoring, the funder takes over credit control and your customers pay them directly, so they know you are using the facility. Plenty of small businesses find that a relief rather than a problem, because chasing payment stops being a job. With invoice discounting you keep collections and the arrangement is normally confidential, but funders want more in return — stronger systems, better reporting and usually a larger, more established business.
Will it upset my customers?
Less than owners expect, and it depends which product you choose. Large companies deal with invoice finance constantly and think nothing of it. If you would rather they never knew, ask about confidential discounting specifically, and check the wording of what appears on your invoices. If the relationship genuinely could not take it, that is a reason to choose the product carefully rather than to rule the whole thing out.
Can a small business use it?
Yes. Selective and single-invoice finance let you fund one customer or one invoice at a time with no whole-book commitment, which suits an occasional need such as one large order or one persistently slow payer. It costs more per invoice than a full facility, and that is the trade for the flexibility. Funders may still want a minimum annual turnover, often somewhere around £30,000.