Invoice Finance Explained: Turning Unpaid Invoices Into Working Capital

Alex BeardsleyFounder & Director

|Updated July 2026

You've done the work. You've sent the invoice. And now you wait 30, 60, sometimes 90 days for a customer to pay, while your own wages, suppliers and rent won't wait at all.

Invoice finance exists to close that gap. A lender advances you most of the value of your unpaid invoices now, typically within 24 hours once the facility is set up, and collects the balance when your customer pays. It's one of the most established forms of business funding in the UK, and one of the least understood.

Here's how it actually works, what it costs in pounds rather than jargon, and how to tell whether it fits your business.

What Is Invoice Finance?

Invoice finance is funding secured against your unpaid invoices. Instead of waiting for customers to settle, a lender advances you a percentage of each invoice's value up front. When the customer pays, the lender releases the remainder, minus their fees.

It only works for businesses that invoice other businesses on credit terms. If your customers pay by card on the day, this isn't your product, and something like a working capital facility or merchant cash advance will likely be a better fit.

How Much of an Invoice Can You Release?

Advance rates vary by lender, industry and the quality of your debtor book. As a general guide across the UK market in 2026:

• Typical advances sit around 80 to 90% of invoice value
• Strong debtor books can reach up to 95% with some lenders
• Newer businesses and construction firms usually see 70 to 85%, reflecting the extra risk lenders price into those sectors

So a £10,000 invoice might release £8,500 on day one, with the remaining £1,500 (minus fees) following when your customer pays. These figures are a general guide, not a quote. Every facility is subject to status and the lender's own checks.

The Four Main Types

1. Factoring

The lender advances funds against your whole sales ledger and takes over credit control, chasing your customers for payment directly. Your customers will know a finance company is involved. In exchange, you stop spending your week chasing late payers.

2. Invoice discounting

Same funding principle, but you keep control of collections and your customers never know. Usually reserved for established businesses with solid credit control processes already in place. Confidential discounting facilities typically advance 75 to 90%.

3. Selective invoice finance

Rather than financing the whole ledger, you pick individual invoices to fund as and when you need cash. Handy if you only have the occasional large invoice creating a squeeze, though the cost per invoice tends to be higher.

4. Non-recourse invoice finance

Includes bad debt protection. If your customer goes bust and never pays, the lender absorbs the loss rather than you. It costs more, but for businesses exposed to one or two large customers it can be worth every penny.

What Does Invoice Finance Cost?

Two charges do most of the work, and it pays to understand both before comparing offers:

• Service fee: typically 0.5 to 3% of your turnover, covering the running of the facility. Most providers charge under 2%.
• Discount charge: interest on the money you've actually drawn, usually around 1.5 to 3.5% over the Bank of England base rate. You only pay it while funds are outstanding.

A worked illustration: a wholesaler advances £51,000 against a £60,000 batch of invoices at 85%. Their customer pays 60 days later. At a discount charge of 2.5% over base, the interest on that advance comes to roughly £500. The service fee sits on top, spread across the year's turnover.

Numbers like these are an illustration only. What you'd actually pay depends on your turnover, your sector, your debtor book and the lender. Whoever you talk to, ask the same question we'd ask on your behalf: what is the total cost over a year, in pounds, including every fee?

Who Invoice Finance Suits

The classic fit is a business to business company on 30 to 90 day payment terms whose growth keeps outrunning its cash. Think recruitment agencies covering weekly payroll while clients pay monthly, wholesalers waiting on retail chains, manufacturers, hauliers, and commercial cleaning firms.

It has a structural advantage over a fixed loan: the facility grows with your sales. Invoice more, release more. There's no need to reapply every time you win a bigger contract.

Where it doesn't fit: consumer-facing businesses, companies paid up front or by card, and situations where the funding need has nothing to do with unpaid invoices. In those cases other funding routes usually make more sense.

How Fast Can You Set It Up?

Setting up a new facility typically takes around a week with independent lenders, and closer to two with the banks. Once you're live, it gets quick: funds against new invoices usually land within 24 hours of uploading them.

That ongoing speed is the real value. After setup, invoice finance stops being an application process and becomes part of how your cash flow simply works.

Common Questions

Will my customers know I'm using it?

With factoring, yes, because the lender handles collections. With confidential invoice discounting, no. Which one you can access depends mostly on your size and how strong your own credit control is.

What happens if a customer never pays?

On a standard (recourse) facility, the debt comes back to you and you repay the advance. Non-recourse facilities include bad debt protection so the lender takes that hit. If a handful of large customers make up most of your ledger, it's worth pricing up the non-recourse option.

Is invoice finance a loan?

Not in the traditional sense. You're releasing money you've already earned rather than borrowing against future profits, and the facility rises and falls with your sales ledger instead of sitting as a fixed monthly repayment.

Can a newer business qualify?

Often, yes. Because the security is your customers' ability to pay rather than your own trading history, lenders care more about who owes you money than how long you've been going. Expect a more conservative advance rate while you build a track record.

CapExpand Ltd (Company No. 14433858) is a commercial finance introducer, not a lender. We are not currently authorised or regulated by the Financial Conduct Authority and do not provide financial advice. All information on this page is for educational purposes only. Funding is subject to status and lender criteria. CapExpand will receive a commission from providers at no extra cost to you.