Invoice finance: how the advance, fees and repayment actually work
In short
Invoice finance advances about 85% of an invoice at once and releases the balance, less fees, when your customer pays. Work out your average days to pay first, because if lateness is the problem, tighter credit control costs less than a facility.
- Invoice finance advances most of an invoice up front and releases the balance, minus fees, when your customer pays.
- On a £10,000 invoice paid in 60 days, the example facility costs £247.81, about 17.7% annualised on the money advanced.
- The service fee is fixed per invoice, while the discount charge grows with every day your customer is late.
- If your gap is lateness rather than long terms, a chasing routine can cut the cost without a facility.
A step-by-step worked example in pounds of one invoice moving through an invoice finance facility, from the 85% advance to the final balance, with the fees, the annualised cost and when credit control is cheaper.
Here is the whole cycle in pounds. You raise a £10,000 invoice on 60-day terms. The lender advances 85%, which is £8,500, within about a day. Your customer pays the lender on day 60. The lender deducts a £150 service fee and £97.81 of discount charge from the £1,500 you were holding back, and releases the remaining £1,252.19. That facility cost you £247.81, or 2.5% of the invoice. The rest of this guide walks through each stage, then shows when chasing payment harder would have saved most of that money.
The figures below are an illustration, not a quote. Real rates vary by lender, turnover, industry and facility type, and the sources behind the ranges are UK-based, so fees are in pounds sterling and reflect UK practice. Check your own facility agreement for the actual numbers.
What invoice finance is
Invoice finance uses your unpaid customer invoices as security for funding. The British Business Bank describes it as a way to bridge the gap between delivering goods or services to business customers and being paid for them. You assign some or all of your outstanding invoices to the lender, and you get access to a percentage of their value, commonly 80 to 90 per cent, almost straight away.
There are two main forms. With factoring, the provider also runs your sales ledger and collects from your customers, who will usually know it is involved. With invoice discounting, you keep collections in-house and the arrangement is often confidential. Factoring carries a higher service fee because the lender does more work. Discounting is cheaper but assumes you already chase invoices well.
Raise the invoice and assign it to the lender
You issue the invoice as normal, with the agreed payment terms, and report it to the lender, usually through an online portal or a ledger feed. In our example the invoice is £10,000 on 60-day terms. Accurate invoices matter here. A wrong purchase order number, a missing line or a disputed price can make the lender refuse to advance against it, so the invoice must be right before it is sent.
Receive the advance
The lender advances an agreed percentage. At 85%, that is £8,500 in your account, often within 24 hours. The remaining £1,500 is the reserve. It stays with the lender as protection until your customer pays. Note that the advance rate is a cap set by the lender's risk view of you and your debtors, and it can be lower for customers it considers risky.
Pay the service fee
The service fee covers administering the facility and, with factoring, managing your ledger and collections. Typical ranges quoted by comparison sites are 0.5% to 3.0% of invoice value for factoring and 0.5% to 1.5% for discounting. At an assumed 1.5%, our invoice carries a £150 fee. It is charged on the invoice value whether your customer pays in 10 days or 90, and some agreements add a minimum monthly charge.
Accrue the discount charge
The discount charge is interest on the money you have drawn, calculated daily at an annual rate, usually a margin over a benchmark such as the Bank of England base rate or SONIA. Assume an all-in rate of 7% a year. The charge is £8,500 x 7% x 60 / 365, which is £97.81. This is the part you control, because every extra day your customer takes to pay adds to it. At 30 days it would be £48.90. At 90 days it would be £146.71.
Your customer pays
On day 60, your customer pays the full £10,000, either to the lender's account (factoring) or to a trust account the lender controls (discounting). The lender matches the payment to the invoice and stops the interest clock. If the customer does not pay, the outcome depends on whether the facility is recourse or non-recourse, so read that clause before you sign.
Receive the balance
The lender takes the £150 service fee and £97.81 discount charge out of the £1,500 reserve and releases £1,252.19. Across the cycle you received £8,500 early and £1,252.19 later, a total of £9,752.19. The cost is £247.81. Because that cost buys 60 days of money on only £8,500, the annualised rate is about 17.7%, far higher than the 7% discount rate suggests. That gap is the thing most people miss, and it comes from the service fee.
What the facility costs over a year
One invoice hides the pattern, so scale it up. Suppose you invoice £200,000 a month, all financed, with the same 85% advance, 1.5% service fee and 7% discount rate.
- Service fees: £3,000 a month, or £36,000 a year.
- Discount charge at 60-day payment: £170,000 advanced x 7% x 60 / 365 is about £1,956 a month, or £23,470 a year.
- Total: roughly £59,500 a year on £2.4 million of invoices, about 2.5%.
Now suppose better follow-up brings average payment down from 60 days to 45. The discount charge falls to about £1,467 a month, which saves around £5,870 a year. The service fee does not change. Watch for other charges as well, such as set-up fees, audit fees, charges for each payment received and termination fees, and add them to your own sum.
When tighter credit control does the same job
Invoice finance solves two different problems, and they are easy to confuse. The first is a structural gap: you pay suppliers and wages in 14 to 30 days and get paid in 60. The second is lateness: customers agreed to 30 days and are paying in 55. Finance helps with both. Credit control only helps with the second.
If most of your cash gap is lateness, work out what it costs. In the example above, 15 days of lateness on £2.4 million of annual invoices is worth roughly £5,870 in discount charge, before you count the service fee you would stop paying if you needed no facility at all. Compare that with the cost of a routine that chases every invoice before it is due.
Practical steps that close lateness without borrowing:
- Send invoices the day work is complete, with the correct purchase order reference.
- Remind customers a few days before the due date, then on the day, then at seven days overdue.
- Ask for deposits or stage payments on larger jobs so less value sits in one invoice.
- Review your oldest invoices every week and name an owner for each.
Zigaflow invoices help here because every invoice leaves with the right references and due date, so there is little to dispute. Credit control puts overdue invoices and chasing history in one place, so reminders go out on schedule. Reporting shows your average days to pay by customer, which is the single number that tells you whether finance or follow-up is the better fix.
A decision rule
Take your average days to pay and your agreed terms. If the difference is more than a couple of weeks, the problem is lateness, and a chasing routine will probably cost you less than a facility. If customers pay on terms but those terms are longer than your own costs can bear, the gap is structural, and invoice finance, shorter terms or deposits are the real options. In that case, ask each lender for a worked example like the one above, with every fee included, and compare the annualised cost, not the headline rate.
Common questions
Sources
- Invoice financeBritish Business Bank · accessed 2026-11-08
- Guide To Invoice Finance FeesMerchant Savvy · accessed 2026-11-08