Invoice finance facilities: how to decide if one fits your cash flow
In short
An invoice finance facility advances cash against unpaid invoices for a service fee plus a discount charge. Measure your debtor days, invoice accuracy and dispute rate first, and tighten invoicing and credit control before you sign with a funder.
- An invoice finance facility advances a share of unpaid invoices and charges a service fee plus a discount charge.
- Published UK ranges are roughly 0.2 to 1.5 percent a month for discounting and 1 to 3 percent for factoring.
- Know your debtor days, invoice accuracy and dispute rate before approaching a funder.
- Fix late and disputed invoices first, because a facility funds a slow process but does not repair it.
- Set decision thresholds in writing and compare at least three written quotes.
An invoice finance facility can bridge a real cash gap, but only if you know your debtor days, invoice accuracy and dispute rate. This guide shows how to measure them, what a facility costs and how to decide.
An invoice finance facility is a funding line secured against your unpaid customer invoices. A provider advances a share of each invoice, usually 80 to 90 percent in the UK, within a day or two, and releases the rest, less fees, when your customer pays. Costs come in two parts: a service fee and a discount charge that works like interest on the cash you draw. Published UK ranges run from roughly 0.2 to 1.5 percent per month for discounting and 1 to 3 percent for factoring, plus set-up costs. Whether you need one comes down to three numbers: your debtor days, your invoice accuracy and your dispute rate.
What an invoice finance facility is
You assign some or all of your outstanding invoices to a provider. The British Business Bank describes the result as a pot of funding that rolls over as invoices are raised and paid, so availability grows as your sales grow. There are two main forms. With factoring, the provider also runs your sales ledger and chases your customers, who will usually know about it. With invoice discounting, you keep collecting payment yourself and the arrangement is often confidential. Selective facilities and spot factoring let you finance chosen customers or single invoices instead of the whole ledger.
The funder is lending against the quality of your debtor book, not only your accounts. That is why the state of your invoicing matters before you sign anything.
What it costs
Funding Circle's 2026 guide puts invoice discounting at about 0.2 to 1.5 percent a month and factoring at about 1 to 3 percent a month, with set-up and other fees on top. These are UK figures and vary by provider, so treat them as a range to test against real quotes. The same guide notes that discounting looks cheaper because you do the collecting, but the gap narrows once you count the cost of your own credit control time.
Read the whole fee schedule
Ask for the service fee, the discount rate, any minimum annual charge, set-up fees, termination notice and what happens to invoices over the funder's concentration limit. The headline rate rarely tells you the total cost.
A simple illustration, using an assumed all-in cost of 1 percent a month: a business with £150,000 of invoices outstanding, funding 85 percent of that, draws £127,500. At that assumed rate, the facility costs about £1,275 a month. If your net margin on the work is 8 percent, that cost has to be weighed against the profit on every invoice it funds. Run the same sum with your own quote.
The three numbers to know first
A funder will assess these. You should know them before the funder does.
Debtor days. Divide trade receivables by credit sales for the period, then multiply by the number of days in that period. If you hold £150,000 of receivables against £300,000 of sales over 90 days, your debtor days are 45. If you invoice on 30-day terms, you have a 15-day slippage problem that a facility will fund but not fix.
Invoice accuracy. Count the invoices issued in a month and the number that needed a credit note, a reissue or a correction. Funders can refuse or reclaim advances against invoices that are wrong or disputed.
Dispute rate. Divide the value of invoices held up by a query by total invoiced value. A high rate means cash is slow because of your delivery or paperwork, not because customers are unwilling to pay.
How to decide whether a facility fits
Pull your aged debtors report
Export every open invoice grouped by age: current, 1 to 30 days overdue, 31 to 60, 61 to 90 and 90 plus. Check that it reconciles with the balance in your accounts. A ledger you cannot reconcile is a ledger a funder will not trust.
Calculate debtor days for three periods
Work out debtor days for the last month, quarter and year. A single month can mislead, especially after a large project invoice. A rising trend matters more than any one figure.
Measure invoice accuracy and dispute rate
Review the last three months of invoices. Count credit notes and reissues, and list every invoice held up by a query. Record the reason for each one, such as wrong price, missing purchase order number, or goods not received.
Find the cause of late payment
Split your late invoices into three groups: customers who pay late by habit, customers who dispute, and invoices you sent late or incorrectly. Only the first group is a pure credit control matter. The other two are fixable inside your own business.
Fix the invoicing and credit control basics
Issue invoices on the day work is delivered or a milestone is certified. Match every invoice to the accepted quote and the customer's purchase order. Set a chase routine at fixed intervals before and after the due date. Re-measure after 60 days.
Model the funding gap
List your forecast cash in and out for the next 13 weeks. If the gap is temporary and caused by one large job, a selective facility or short-term lending may suit better. If it is permanent growth, with supplier and payroll costs paid long before customers pay, a rolling facility fits.
Compare at least three providers
Request written quotes using the same invoice volumes and debtor days. Compare factoring and discounting, whether it is disclosed to customers, recourse terms, minimum fees and notice periods. Check whether the provider belongs to a recognised trade body and follows its code of conduct.
Set a decision rule before you sign
Write down the thresholds, for example: debtor days under 50, dispute rate under 3 percent, and total finance cost below a stated share of gross margin. If you miss them, work on the causes for another quarter. If you meet them and the gap is real, a facility is a reasonable tool.
Where the data comes from
You can only measure these numbers if invoices, quotes and payments sit in one place. Invoices raised from an accepted quote carry the agreed prices and scope, which removes a common cause of disputes. Generating invoices directly from the job or order, with payment status tracked against them, gives you an aged debtors view without a spreadsheet rebuild. Reporting then lets you track debtor days and overdue balances each month, so you see the trend before a funder does. The principle applies whichever system you use: one source of truth for what was agreed, what was billed and what was paid.
Do not finance a broken process
Selling bad invoices to a funder does not remove the dispute. It adds fees and can mean advances are clawed back. Fix the cause first, then fund the gap that remains.
Common pitfalls
Signing a long contract in a panic is the biggest one. Facilities often carry notice periods and minimum charges, so leaving is slow and expensive. A second pitfall is financing the whole ledger when only one slow-paying customer causes the gap. A third is forgetting that factoring puts a third party in contact with your customers, which matters if your relationships depend on a personal touch.
If your numbers are tight and the cause is clear, a facility can smooth a real timing gap. If they are unknown, the cheaper first move is to measure them, tighten invoicing and credit control, and ask the question again in a quarter.
Sources
- Invoice financeBritish Business Bank · accessed 2026-10-21
- Invoice Factoring vs Invoice DiscountingFunding Circle · accessed 2026-10-21