Invoice Finance

What is Invoice Finance Funding ?

Invoice finance is a way for businesses to unlock cash tied up in unpaid invoices. Instead of waiting 30, 60, or even 90 days for customers to pay, a lender advances most of the invoice value upfront — usually between 80–95%. When the customer settles the invoice, you receive the remaining balance minus a small fee.
It’s a fast, flexible way to improve cash flow, pay suppliers, and keep your business moving.

Invoice Finance

Invoice finance is designed for businesses that trade with other businesses (B2B) and offer customers credit terms. While extended payment terms — typically anywhere between 7 and 120 days — can help secure new business, they can also create cashflow challenges while waiting for invoices to be paid.

Invoice discounting solves this problem by advancing a percentage of your invoice value upfront — usually 50% to 95%— giving you immediate access to working capital. This can help cover wages, replenish stock, or fund growth without waiting for customer payments. When your client pays their invoice, you receive the remaining balance, minus the lender’s fees.

Funders usually charge a service fee (flat or variable) and interest on the funds advanced. Some may also charge for drawdowns or money transfers.

Beyond everyday cashflow support, invoice finance can also release capital tied up in your debtor book, helping fund acquisitions, growth projects, or property purchases.

There are three main types of invoice finance products:

Invoice Discounting
Factoring
CHOCS (Client Handles Own Collections)

Selective Invoice Finance

Some funders provide “selective” invoice discounting which means that they don’t fund the full ledger just selected invoices. This can be useful if you experience a one-off big order or have a couple of bigger clients on extended terms where you need to balance out doing good business with keeping the cashflow moving.

Factoring

Factoring is normally a disclosed service, but not always. The client will see the details of the funder on the invoices and the funder will chase the debt in their own name. Some clients love this because it keeps customers on a payment structure and someone else is doing the chasing and where required sending letters etc to make sure the invoice gets paid.

In many ways you could see this as the funder “buying” your book debt and then collecting it in as it’s debt.

Factoring can provide a good break between you as a business trying to do more business with your clients and at the same time trying to collect monies in from the same client. Others might find that they would not have handled the collection of the debt in the same way, typically this is only when people are moving from ID.

Factoring is suitable for smaller businesses because the minimum ledger size is in the region of £50k, it also means that if you are a smaller business you don’t have to employ a person to chase the invoices.

Factoring can often be put in place as a one-off hit i.e. an advance on the debtor book without a long term agreement to continue funding as with invoice discounting.

Factoring can either be “recourse” or “non-recourse” i.e. if the client doesn’t pay there is recourse for the funder (or not) to you.

CHOCS

CHOCS stands for “Client handles own collection” it’s often seen as a halfway house between factoring and invoice discounting. The service is sometimes disclosed to your clients but you handle your own collections which some clients like.

Costs & Considerations

Typical costs include an arrangement fee (but not always), an interest rate akin to an overdraft rate (say 2.25%) and then a service charge which is based on turnover (say 0.22%). Some providers offer a flat fee for the facility regardless of interest rate or turnover.

Initially there will be a debtor verification exercise, which means someone will call a sample of the invoiced clients to verify that the debt is valid, some funders charge for this.

Some lenders charge a renewal fee annually, others will agree a facility for say 24 or 36 months without a renewal fee until the end of the facility.

For most situations, lenders require a good papertrail from purchase order, to invoice, to proof of delivery – this means that if it comes to a situation where your customer is denying the debt, the papertrail provides reasonable proof of debt.

If your debt has contractual elements to it then it will limit the choice of funders – typically anything related to construction, provision of a service or requiring customer signoff or staged payments is contractual. Non-contractual debt is where a product is shipped on a “fire and forget” basis.

Lenders will want to know your level of contra payments, bad and doubtful debt i.e. debts outside of terms of trade, together with any intra-company trading – this is all “reserved” or excluded from the funding provided.

It’s worth considering that moving to ID can take some adjustment, your invoices will need to have the funder’s sort code and account number on them which means a reprint of stationery and educating clients on where to pay, this typically settles down after a payment cycle.

If invoice finance sounds like the product for you, get in touch here.

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Funding Friends is a trading style of Funding Friends Ltd, registered in England No. 12693505

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Funding Friends operates as a commercial finance broker and is not a lender. Any finance or products arranged through Funding Friends is entered into entirely at your choice and is at your risk, and you are advised to consult qualified professionals outside of Funding Friends to make the right decision for your needs and circumstances. Your property or other assets may be repossessed if you do not keep up repayments on any debt secured against it. Funding Friends may receive a commission or finder’s fee for effecting introductions to lenders or third parties.