Invoice finance: factoring, discounting and selective funding explained

Invoice finance for growing UK businesses comes from banks such as Barclays Invoice Finance, Lloyds Bank Commercial Finance and Close Brothers, independent specialists such as Bibby Financial Services, Time Finance and Ultimate Finance, and providers such as Kriya that fund single invoices. Smart Funding Solutions, a whole-of-market commercial finance broker, compares invoice finance providers on our panel and matches the facility to how your sales ledger is growing.

Why invoice finance suits a growing business

A loan is a fixed sum, but an invoice finance facility is set against your sales ledger, so the cash you can draw can rise as you invoice more. The provider advances an agreed share of each approved invoice and releases the balance, less its fees, when your customer pays. That suits a business taking on bigger customers or longer payment terms, where sales grow faster than the cash coming in.

Which type of provider fits which need

• Your whole sales ledger, with credit control handled for you: invoice factoring, offered by providers such as Bibby Financial Services, Close Brothers, Time Finance and Ultimate Finance.
• Keeping control of collections: invoice discounting, often from banks such as Barclays Invoice Finance and Lloyds Bank Commercial Finance, and usually for larger, established ledgers.
• One invoice or one customer at a time: selective invoice finance, from providers such as Kriya.
• Construction applications for payment: construction invoice finance, from specialists such as 4Syte.
• Customers abroad: export invoice finance.

Each provider sets its own criteria, advance rates and fees. Our invoice finance comparison guide lists more providers on our panel, and our guide to what invoice finance costs explains service fees and discount charges. The British Business Bank explains how the products work in its invoice finance guide. Instant Quotes shows which invoice finance providers on our panel may suit your business, with no credit check.

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.

Providers price and set limits by sector, because invoices in some trades are harder to collect. These pages cover the detail for each:

• Recruitment finance for agencies paying temps weekly.
• Construction invoice finance for applications for payment and retentions.
• Export invoice finance for overseas customers.
• Invoice finance with one main customer, where concentration limits apply.
• Whole turnover invoice finance for funding the full sales ledger.

GOV.UK publishes how quickly large businesses pay their suppliers, which can help you judge a customer: see GOV.UK: check when businesses pay invoices. You also have a legal right to charge interest on late commercial payments: see GOV.UK: charging interest on commercial debt.