Invoice finance: factoring, discounting and selective funding explained

Most facilities combine a service fee, often a percentage of turnover or a fixed monthly amount, with a discount charge on the money drawn, similar to interest. Some add set-up fees, bad debt protection, audit fees or charges on overdue invoices. The price depends on your turnover, sector, invoice volumes, customers' credit quality and the type of facility. Our guide to comparing invoice finance providers shows how to compare quotes like for like.

• Minimum term and notice period: many whole-ledger facilities have both, with fees for leaving early.
• Minimum fees: some contracts charge a minimum even if you use the facility less.
• Recourse: on a recourse facility you repay the advance if a customer does not pay; non-recourse includes bad debt protection at extra cost.
• Concentration limits: lenders may cap funding against any single customer.
• Ineligible debts: overseas, related-party or very old invoices may be excluded.
• Personal guarantees: directors may be asked to guarantee warranties given about the invoices.

A new invoice finance facility typically takes one to three weeks from application to first drawdown, depending on the type and how ready your information is. Selective or spot funding of a single invoice is often quickest, because the provider only checks that invoice and that customer. Factoring usually moves faster than invoice discounting, which normally involves a fuller audit of your ledger and credit control. Things that slow it down include an aged debtor report that does not reconcile, disputed or contra-traded debts, construction applications for payment, and the need for an existing lender to sign a deed of priority or waiver. Once the facility is live, money against approved invoices is typically released within a working day or so of submission, depending on the provider.

The main security is the debts themselves: your invoices are assigned to the provider, which collects payment into an account it controls. Most whole-turnover facilities are also backed by a debenture with fixed and floating charges, so the provider's claim on the sales ledger is registered at Companies House. If a bank already holds a debenture, it is usually asked to agree a deed of priority or waiver releasing the book debts. Directors are commonly asked for a personal guarantee or an indemnity covering the accuracy of the invoices they submit, rather than the customers' ability to pay. Property is not normally required. Our guide to debentures and fixed and floating charges explains how these charges work.

If you do not sell on credit, or need a fixed sum for a specific purpose, a revolving credit facility, working capital loan or trade finance may fit better. Tighter credit control, such as clear payment terms and prompt chasing, can also reduce how much funding you need.