How does invoice finance work?

Invoice finance turns your unpaid sales ledger into cash. You raise an invoice on 30-, 60- or 90-day terms, put it through the lender's system, and within 24-48 hours you can draw up to 85% of the approved value. When your customer pays, the lender deducts fees and sends you the remainder. The facility revolves with the ledger.

What actually happens to your invoices

You notify or assign the invoice to the lender, usually through a portal or accounting integration. The lender checks the customer and the invoice, advances a percentage, and holds the rest in reserve.

For a £10,000 invoice at 85%, you draw £8,500 almost immediately. The remaining £1,500 sits in reserve until your customer pays, at which point the lender deducts the service fee and discount charge and remits what is left.

The headline rate is a ceiling, not a floor. Disputed invoices, construction retentions, overseas debts, aged debts over 90-120 days, and related-party debts are usually excluded or capped. One customer making up more than about 20% of your ledger typically triggers a concentration limit unless credit insurance covers the excess.

Invoice discounting vs factoring

With invoice discounting, you keep credit control and the facility is normally confidential. Customers pay into an account in your business's name. This suits established businesses with solid internal credit control (typically £500,000 turnover and up) and costs less because the lender is not chasing debts.

With invoice factoring, the lender collects in its own name. Customers receive notice of assignment and pay the factor directly. This costs more, because the service fee includes collections and ledger management, but it is the usual route for smaller or fast-growing businesses that do not want a credit-control team.

What it really costs

The discount charge is interest on drawn funds, calculated daily at the Bank of England base rate (3.75% as of July 2026) plus a lender margin. For a mainstream SME the margin is typically 2.0-3.5%, giving an effective rate of roughly 5.75-7.25%. You pay it only on what you draw.

The service fee is often the bigger figure: a percentage of turnover, charged monthly on invoice value processed. A £2 million business on 0.75% pays £15,000 a year before interest. At £500,000-£2 million turnover, invoice discounting typically costs 0.5-1.0% of turnover; factoring usually costs 1.0-2.0%. Below £500,000, factoring tends to be the only realistic option and can run 1.5-3.0%.

The fees that rarely appear in the headline quote matter too: arrangement fees of £500-£2,000; audit fees of £200-£500 per visit, two to four times a year; CHAPS fees of £15-£25 per drawdown; credit-checking fees for new customers under factoring; minimum annual fees around £3,500 even at low usage; and termination fees of three to six months' projected service fees.

The working-capital cycle: a one-off lift, then a permanent cost

Opening a facility gives you a one-off cash inflow. A business with £300,000 outstanding at an 85% advance rate gets £255,000 on day one: cash previously tied up in debtor days, usable to pay suppliers, reduce an overdraft, or fund payroll.

That is the only surge. From day two the facility merely accelerates payment on each new invoice. The cost, however, keeps running every month. You are paying for speed, not for new money, long after the initial benefit is gone.

Exiting is the part brokers rarely explain. When you leave, the £255,000 advance is no longer available. Your customers still owe the same debts, but you go back to waiting for them to pay. You must rebuild that working capital from retained profits, an overdraft, a working-capital loan, extended supplier terms, or a smaller sales ledger. Fees continue through the notice period, and termination fees often apply.

Growth funding and the margin catch

Invoice finance scales with the ledger. As turnover rises, the eligible debtor book grows and your drawing power grows with it. For asset-light businesses such as services, recruitment and distribution, this is often the main working-capital tool available.

The catch is that the cost scales too. A service fee is a straight percentage of turnover. If your gross margin is 20%, a 1.5% service fee plus discount charge can consume 7-9% of your gross profit. On 15% margins the same facility absorbs nearly 12%. The cash helps you grow only if the margin can carry the financing cost.

A worked example: a £2 million business with a £300,000 ledger

Take a business turning over £2 million a year, with £300,000 outstanding to creditworthy UK customers on roughly 60-day terms. Invoices are clean, the debtor base is diversified, and it runs its own credit control. It takes confidential invoice discounting at 85%.

On day one it draws £255,000. The £45,000 reserve is released as customers pay, minus fees.

The annual cost: a 0.75% service fee on £2 million turnover is £15,000. Discount charge at 5.75% on the average £255,000 drawn is £14,663. Add two audit visits at £350 each and around fifteen drawdowns at £20 each. The running cost is roughly £30,700 a year, or 1.53% of turnover. In the first year there is also a one-off arrangement fee of £1,000-£1,500, so the all-in first-year cost is about £32,000.

Against a 20% gross margin (£400,000 gross profit) the facility consumes about 7.7% of gross margin. The cash is real, the growth option is real, and so is the cost.

How much can you actually release?

Eighty-five per cent is the UK market standard for a mainstream SME with a diversified, creditworthy ledger. Some funders, such as Bibby, advertise up to 90% for lower-risk, well-established businesses, usually at a higher rate. Higher-risk sectors, concentrated ledgers, or weaker credit profiles may see 70-80%.

One hundred per cent is possible, but only through the Growth Guarantee Scheme, and only from some funders, not the whole market. Under GGS, the government gives the lender a 70% guarantee, which is what makes a handful of accredited funders comfortable overfunding to the full ledger value; your business remains fully liable for repayment. GGS-backed invoice finance is available to qualifying UK businesses with turnover up to £54 million, with facilities capped at £2 million. Whether your business qualifies, and whether the funder in front of you will go to 100%, is decided at lender assessment. It is a scenario worth pricing, not an offer.

Estimate your invoice ledger

Use monthly gross revenue and average debtor days to estimate the gross ledger before funder deductions. This is a starting point for a conversation, not a cash-release figure.

Use the invoice estimator

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