Invoice finance vs invoice factoring vs selective invoice finance

If your customers are other businesses and pay on 30, 60 or 90-day terms, a lot of your cash can sit in unpaid invoices. Invoice finance releases most of that money within days of raising the invoice. There are a few different versions, and the names are often used loosely. This guide explains each one in plain English.

How invoice finance works

You raise an invoice to a business customer as normal. A finance provider advances you an agreed percentage of its value. With single-invoice (selective) finance this is typically up to 99%, often the same day; whole-ledger facilities typically advance 80–90%. When your customer pays, the provider releases the balance to you, minus its fees.

Because the funding is tied to your sales ledger, the amount available grows as your sales grow. That makes it popular with businesses that are expanding and find that cash lags behind the work they have done.

As a rough guide to the size of facility, estimate your outstanding invoices: monthly invoicing multiplied by your payment terms in months. A business invoicing £60,000 a month on 60-day terms has about £120,000 outstanding at any time. With selective finance at up to 99% per invoice (up to £100,000 per invoice), that could support up to around £118,800, although a first facility is usually also limited to about a fifth of annual turnover. Our quote shows a figure like this when you tell us about your invoicing.

Invoice factoring

With factoring, the provider takes over collecting payment from your customers. It runs your sales ledger, chases invoices and your customers pay the provider directly.

• Good for: smaller or growing businesses without a dedicated credit control team.
• Things to know: your customers will know you use a finance provider, and fees are usually higher because of the collection service.

Invoice discounting

With invoice discounting, you keep control of your sales ledger and collect payments yourself. The arrangement is often confidential, so customers may not know you are using finance.

• Good for: established businesses with solid credit control and a reasonable turnover.
• Things to know: providers usually want to see good collection records and may set a minimum turnover.

"Invoice finance" is often used as an umbrella term covering both factoring and discounting.

Selective (single) invoice finance

Selective invoice finance, sometimes called spot factoring, lets you fund individual invoices when you choose, rather than your whole ledger.

• Good for: businesses with occasional large invoices, or those who only need funding now and then.
• Things to know: you pay one fee per advance — for example around 1.8% for a 30-day advance (0.06% per day) — only when you use it, usually with no setup fees and no long contract.

Whole ledger or selective?

A whole-ledger facility generally offers lower fees and a higher overall limit, but you commit to financing all eligible invoices and may sign a minimum-term contract. Selective finance is more flexible but usually more expensive per invoice.

What it costs

Costs usually include:

• A service or administration fee, often a percentage of turnover or a fixed monthly fee.
• A discount charge, similar to interest, on the money advanced while invoices are outstanding.
• Possible extras such as bad debt protection, set-up fees, or charges for ending the contract early.

Ask for a full cost illustration based on your real invoicing pattern.

Recourse and non-recourse

Under a recourse facility, if your customer does not pay, you have to repay the advance. Under non-recourse, the provider carries some of the bad debt risk, usually for an extra fee and within limits. Read the terms carefully.

What providers look at

• Who your customers are and how creditworthy they are.
• Your invoicing and payment history, and how spread out your customers are.
• Your terms of trade and contracts.
• Any existing charges over your book debts.

Invoice finance is assessed largely on the quality of your customers, which can help businesses that are growing fast but have limited profit history.

Is it right for you?

Invoice finance tends to suit B2B businesses with regular invoicing and payment terms of 30 days or more. It is not suitable if you mainly sell to consumers or take payment upfront.

During our quote, tell us whether you invoice other businesses, your monthly invoicing and your usual payment terms, and we will show an indicative invoice finance amount. All figures are indicative only and subject to lender assessment and approval.