Invoice finance

Also called Factoring, Invoice discounting, Debtor finance

Borrowing against invoices you have raised but not been paid for. Solves a timing problem at a price.

What it means

Invoice finance advances you a proportion of an invoice's value — commonly 70–90% — as soon as it is raised, with the balance less fees when the customer pays.

Factoring includes credit control: the provider chases your customers, and they know about the arrangement. Invoice discounting is confidential and you continue to collect.

Why it matters

For a business whose problem is working capital rather than profitability, it directly addresses the gap. It also grows with sales, unlike a fixed overdraft.

It is not cheap, and the headline discount rate is rarely the whole cost.

What it looks like in practice

Look at the total cost: the discount rate on drawn funds, the service fee as a percentage of turnover, and the extras — audit fees, minimum fees, refactoring charges on late invoices, termination notice.

Selective or spot factoring lets you finance individual invoices rather than the whole ledger, at a higher rate.

What to watch out for

Personal guarantees and warranties about the validity of invoices. If a customer disputes an invoice, the provider will usually recourse it back to you.

Long notice periods on termination, which are common and make switching hard.

Customer perception, if you are factoring rather than discounting. In some sectors it is normal; in others it is read as distress.

Where to get proper advice

A commercial finance broker who is FCA-registered where required, and your accountant on whether the cost is justified against the margin. UK Finance publishes guidance on the sector.