Invoice finance is one of the oldest forms of business lending in the UK and one of the most widely used. A lender advances money against your unpaid sales invoices, so the cash you have already earned arrives when you need it rather than 30, 60 or 90 days later. For a growing business that sells on credit terms, it can release far more working capital than an overdraft, and the facility grows with your sales.
It is also a product where the headline terms tell you little. The real cost and flexibility sit in the detail of how the lender counts your invoices and how hard it is to leave.
The two main types
Factoring
With factoring, the lender buys your invoices and runs your sales ledger. It sends statements, chases payment and collects the cash from your customers, who are told that the invoices have been assigned. Factoring suits smaller businesses without a dedicated credit control team, and the service element is reflected in the fee.
Invoice discounting
With invoice discounting, you keep control of your sales ledger and collect from customers yourself. The lender advances against the invoices and monitors the ledger through regular reports and audits. It is often confidential, meaning customers are not told, and it is the more common choice for established businesses with good credit control. Lenders usually want to see a track record, sound systems and a certain level of turnover before they offer it.
Both can be arranged with recourse, where you carry the risk of a customer not paying, or without recourse, where the lender takes that credit risk, usually backed by credit insurance and at a higher cost.
How much you can borrow
The lender applies an advance rate to your eligible invoices. Rates of around 80 to 90 percent are common for a clean, diversified ledger. The word that matters is eligible. Lenders typically exclude:
- invoices beyond a set age, often 90 or 120 days from the invoice date
- amounts owed by connected companies
- customers who are also suppliers, because they can set off what you owe them
- overseas customers, unless the lender is comfortable with the jurisdiction or the debt is insured
- disputed invoices, credit notes and contra balances
- the part of any single customer's balance above a concentration limit
Concentration limits catch many businesses out. If one customer makes up 40 percent of your ledger and the limit is 25 percent, the excess is not funded at all. Before signing, model what you would actually be able to draw on your current ledger, not the theoretical figure on the term sheet.
What it costs
Most facilities have two main charges. The discount charge is interest on the money you have drawn, quoted as a margin over the Bank of England base rate, which stood at 3.75 percent after the Monetary Policy Committee held it in September 2026. The service fee covers running the facility and is usually a percentage of turnover, sometimes with a minimum annual amount.
Then there are the smaller items: set-up fees, audit fees, charges for same-day payments, credit insurance premiums and fees for refactoring aged invoices. They add up. Ask for an example of the total annual cost on your own numbers, including minimum fees if your turnover falls.
Security and exit terms
An invoice finance provider will take security over your receivables, usually through a debenture, and may ask for a personal guarantee or an indemnity from the directors covering losses caused by invalid invoices. Read what that guarantee actually covers.
Exit terms deserve the most attention. Many contracts have a minimum term and a notice period, often several months, and charge a termination fee if you leave early. When you move to a new lender, the outgoing provider has to be repaid in full and release its security before the new facility can be drawn, which needs planning. A cheap facility with a long notice period and a heavy exit fee can cost more than a slightly dearer one you can leave easily.
Selective and spot facilities
Not every business wants its whole sales ledger financed. Selective invoice finance lets you fund particular customers or contracts, and spot factoring lets you finance a single invoice when you need the cash. They are more expensive for each pound borrowed but come without long contracts or minimum fees, which suits businesses with occasional cash needs or one large customer on long payment terms. For a business with regular, broad-based credit sales, a whole-ledger facility is usually cheaper over a year.
When to move to asset-based lending
As a business grows, a receivables-only facility can become restrictive. Asset-based lending adds other assets to the borrowing base, such as stock, plant and machinery or property, and combines them into a single revolving facility, often with a term loan alongside. It suits larger companies with significant inventory or equipment and usually comes with more detailed reporting and periodic field exams.
The UK market for this kind of lending is broad. The British Business Bank's Small Business Finance Markets report for 2025/26 found that challenger and specialist banks provided 60 percent of gross SME bank lending excluding overdrafts in 2025, against 39 percent in 2012. Many of the most active invoice finance and asset-based lenders sit in that group, alongside the large clearing banks and independent specialists.
Before you sign
- Run your current aged debtor report through the lender's eligibility rules and concentration limits to see your true availability.
- Ask for the full annual cost on your own turnover, including minimum fees.
- Check the minimum term, notice period and termination fee.
- Understand the scope of any personal guarantee or warranty indemnity.
- Decide whether you want customers to know: disclosed or confidential.
- Consider whether an asset-based facility would release more cash from the whole balance sheet.
Kenward Partners works with UK invoice finance and asset-based lenders, from the clearing banks to specialist providers. We can model the real availability and cost of competing offers on your own ledger, so you choose the facility that fits how your business actually trades.
Sources: British Business Bank, Small Business Finance Markets 2025/26; Bank of England, September 2026.
