Cash flow keeps every business running, but when clients take 30, 60 or even 90 days to pay, it can put real strain on your plans. You’ve delivered the work, sent the invoice and now you’re waiting for the money to land.

Invoice financing, also known as invoice finance, helps you unlock most of that value upfront. It gives you fast access to the cash tied up in unpaid invoices, so you can cover costs, pay staff or take on new opportunities without waiting for late payments to clear.

In this guide, we’ll break down what invoice financing is, how it works, the main types available and how to tell if it’s right for your business.

What Is Invoice Financing?

Invoice financing is a way for businesses to release money that’s locked up in unpaid customer invoices. Instead of waiting weeks or months for clients to settle their bills, a finance provider advances most of the invoice value upfront.

Also known as invoice finance, it’s designed to smooth out cash flow, cover running costs, or free up funds for growth – all without taking on additional debt. When your customer pays their invoice, the remaining balance is released to you, minus a small service fee.

Put simply, invoice financing turns the money you’ve already earned into working capital you can use to keep your business moving.

How Does Invoice Financing Work?

Invoice financing works by using your unpaid invoices as collateral for short-term funding. Instead of waiting for customers to pay, you sell or assign those invoices to a finance provider, who advances a large portion (usually 80% to 90%) upfront.

Here’s how it typically works step by step:

• You raise an invoice for goods or services you’ve delivered.

• You share the invoice with a finance provider.

• They advance most of the invoice value straight into your business account.

• Your customer pays the invoice in their usual time frame.

• You receive the remaining balance, minus a small service fee or discount charge.
  

For example, if you issue a £10,000 invoice and your provider advances 85%, you’d receive £8,500 straight away. Once your customer pays, you’d get the final £1,500 minus the agreed fees.

Invoice financing keeps cash flowing smoothly so you can plan ahead, pay suppliers on time and take new opportunities without waiting for invoices to clear.

Types of Invoice Finance

There are two main forms of invoice finance, plus a flexible option if you only need short-term support. Each works slightly differently, but they all help you access funds tied up in unpaid invoices.

Invoice Factoring

With invoice factoring, the finance provider collects payments from your customers for you. It’s often used by businesses that prefer to hand over credit control so they can focus on daily operations. 

Customers pay the provider directly, so they’ll know you’re using a factoring service. This approach is common for companies that work with big clients who take longer to pay, such as wholesalers or manufacturers.

Invoice Discounting

With invoice discounting, you stay in control of collecting payments. The provider advances most of the invoice value upfront, and your customers continue to pay you as usual. It’s usually a confidential setup, which means clients won’t know you’re using finance. 

This option tends to suit businesses with consistent invoicing and reliable payment habits, such as professional service firms or marketing agencies.

Selective or Spot Invoice Finance

Selective invoice finance lets you choose specific invoices to fund instead of committing to your full sales ledger. It’s useful for businesses that only need to ease cash flow occasionally or want support for a single large invoice. 

A construction company waiting on a big project payment, for example, might use selective finance to cover costs while the client processes their payment.

Advantages of Invoice Financing

Invoice financing can be a simple way to keep cash flowing without taking on new debt. It helps you access money you’ve already earned and use it when you need it most. Here are some of the key benefits.

Faster access to funds

Instead of waiting 30, 60 or 90 days for customers to pay, you can unlock most of the invoice value within a few days. That can make a big difference when you need to cover wages, buy stock or manage seasonal expenses.

Smoother cash flow

Because the amount you can access grows in line with your sales, invoice finance moves naturally with your business. When trading is strong, you can draw on more funds, helping you plan ahead with confidence.

No need for additional security

In most cases, invoice finance is unsecured. That means you don’t need to offer property or other assets as collateral, making it more accessible than a traditional loan.

Less time chasing payments

If you use factoring, the provider manages your sales ledger and collects payments from customers on your behalf. This can free up time for you and your team to focus on running the business instead of following up on invoices.

Flexible to your needs

With options like selective invoice finance, you can choose when and how to use funding. That flexibility makes it easier to manage short-term gaps or respond quickly to new opportunities.

Disadvantages to Consider

While invoice financing can be a useful way to manage cash flow, it isn’t always the right fit for every business. It’s worth weighing up a few points before you decide.

Overall cost

Invoice finance can be more expensive than a standard business loan or overdraft. You’ll pay fees for the service and interest on the amount advanced, which can add up if you rely on it often.

Customer relationships

If you choose factoring, your customers will know a third party is handling payments. Some businesses prefer to keep collections in-house to maintain direct contact and control.

Eligibility and limits

Providers usually look for customers with strong payment records. If you work with clients who pay late or unpredictably, it can affect how much you’re able to access.

Dependence on sales volume

Because invoice finance is tied to your invoicing, it works best when you have steady turnover. If sales dip, the funding available will fall too, which can make planning ahead more difficult.

Contract terms

Some agreements come with notice periods or minimum usage requirements. It’s important to check the terms carefully so you know exactly how flexible the arrangement is.

Is Invoice Finance Right for You?

Invoice finance can be a useful way to keep your business moving when cash is tied up in unpaid invoices. It gives you access to money you’ve already earned, so you can cover costs or take on new work without waiting for customers to pay.

We recommend it for businesses that invoice other companies on credit terms, such as wholesalers, manufacturers or agencies. If your customers usually pay straight away, something like a business loan or merchant cash advance may suit you better.

Before deciding, think about how often you invoice, how quickly your clients pay and how comfortable you are with a provider managing payments on your behalf. These small details help determine whether factoring, discounting or a selective option will work best for you.

If you’d like to learn more about invoice financing, visit our invoice finance page.