Invoice finance UK: factoring vs discounting explained
How factoring and invoice discounting actually work in the UK, cost shapes, eligibility, and when each is the right structure.
The core idea
Invoice finance turns eligible unpaid B2B invoices into working capital. The provider advances an agreed percentage of qualifying invoices and releases the remaining eligible balance, less charges, after the customer pays. Percentages and timing depend on the facility and ledger checks.
It is the natural facility for businesses that sell on 30-, 60- or 90-day terms and are cash-constrained by their own success.
Factoring vs invoice discounting
Factoring: the finance provider takes on collections. Your customer is notified and pays the funder directly. Cheaper for small ledgers, but visible to your customer.
Invoice discounting: confidential. You continue to run collections and remit as customers pay. Priced slightly higher, but the customer does not see the facility.
Selective invoice finance: pick and choose which invoices to fund. Highest per-invoice cost, but no whole-ledger commitment.
Cost and eligibility
Typical UK cost is a service fee (0.5–3% of turnover) plus a discount charge (base rate + 2–5%) on the advance. For a £1m turnover business, all-in cost is often 1.5–3% of turnover.
Eligibility requires B2B invoicing (not consumer), clean debtor concentration (no single customer over ~30% of the ledger), and typically 12 months+ of trading.
Test the ledger before comparing prices
Measure eligible debt
Separate consumer sales, old debts, disputed invoices, contractual applications and concentrated customers. Not every invoice will support an advance.
Map the full fee
Combine service fees, discount charges, minimum fees, audit costs and any bad-debt protection. Model expected utilisation rather than the maximum limit.
Review customer impact
Decide who controls collections, what customers are told and how disputes or credit notes reduce availability.
Application checklist
- Aged debtor ledger
- Customer concentration
- Standard terms and contracts
- Credit-note and dispute history
- Bad-debt history
- Proposed fees and concentration limits
Useful primary and industry references
These references support further research. Product terms and official guidance can change.
Frequently asked
Will my customers know I use invoice finance?
With factoring, yes. With confidential invoice discounting, no.
Can I fund a single invoice?
Yes, via selective invoice finance. Cost per invoice is higher than a whole-ledger facility but useful for one-off cash needs.
What if a customer does not pay?
Depends on recourse. With recourse invoice finance, you repay the advance; without recourse, the funder absorbs the loss. Non-recourse is more expensive.
