Release cash from unpaid invoices using invoice finance

What is invoice finance?

Invoice finance is a distinct form of commercial funding that revolves around unlocking the funds tied to outstanding invoices. The two primary categories of invoice finance are invoice factoring and invoice discounting. Both methods aim to achieve the same result of releasing the value tied up in unpaid invoices, but they differ in how the money is subsequently collected from customers and clients.

How an invoice finance facility can help your business

Enhance your business cash flow by unlocking up to 90% of an invoice’s value, usually within 24 hours, instead of waiting for conventional payment terms like 30, 60, or even 90 days.

Invoice factoring and discounting present an alternative to traditional bank loans, proving beneficial for businesses with a reliable customer base that consistently pays on time and in full. While these two forms of invoice finance share many similarities, a key difference exists, making one potentially more suitable for your business.

Invoice funding, based on your total sales ledger value, is inherently less risky than traditional bank lending, which may involve personal guarantees. However, even with a willing lender, careful consideration is essential when opting for invoice finance.

Now, let’s delve into the primary characteristics of invoice factoring. 

Invoice factoring for business

The fundamental concept of this funding type involves receiving a regular cash lump sum throughout the month, ensuring a consistent cash inflow that stabilises business finances with minimal risk to the owner/directors.

The amount a factoring company is willing to lend hinges on your sales ledger’s value and the reliability of your debtors in making payments. Ideally, having minimal bad debts is desirable, potentially attracting favourable interest rates and charges on the borrowed funds.

Who provides invoice finance services, and how does the system work?

Factoring services are often offered by specialised departments within prominent financial institutions, but independent lenders have also entered this expanding market, potentially offering more flexibility to small businesses.

The lender typically provides a percentage of each unpaid debtor invoice, usually ranging between 80% and 90%, upon sending the invoice to the debtor. Once your customer pays the full amount, the factoring company remits the remaining sum after deducting their fees and charges for the service.

A drawback of this financing facility is the transfer of control over the sales ledger to the factor, who handles all reminders, statements, and other necessary correspondence regarding the debt. Whether this is viewed as a disadvantage depends on your perspective and the importance you assign to personalising contact with your customers.

Are factoring loans the best option for your business?

Whether invoice factoring is the appropriate option for you hinges largely on how crucial it is to retain control of your credit function. Some business owners prefer maintaining direct contact with customers to preserve confidentiality and goodwill, aligning all correspondence with their business ‘values.’

While this lending approach is gaining widespread acceptance, it’s not unusual to receive payment reminders from a third party.

For some businesses, retaining control of the sales ledger may not be a priority. Nevertheless, invoice financing, in either scenario, presents numerous advantages that warrant consideration. 

These include:

  • Consistent cash lump sums deposited throughout the month for improved cash flow
  • Lower risk compared to obtaining a ‘standard’ bank loan
  • Lower perceived risk for the lender
  • Facilitates sustainable business growth
  • Potential encouragement for slow-paying customers to settle promptly with a third party involved


Now, let’s explore whether invoice discounting might be a more suitable option for certain businesses.

What is invoice discounting?

Invoice discounting varies slightly from factoring as control of the sales ledger remains with you. You retain the responsibility for collecting customer payments and pursuing outstanding amounts. This ensures confidentiality, as customers remain unaware of the invoice finance facility, which is crucial for some businesses, as mentioned earlier.

The process closely mirrors factoring, where the lender provides a percentage of each invoice when issued. This ensures a more consistent cash flow and instils confidence that working capital will be accessible as needed, whether for settling upcoming bills or fostering business growth.

The meaning of ‘with and without recourse’

You may choose between ‘with recourse’ and ‘without recourse’ options for invoice funding. This decision dictates whether your business assumes liability for any unpaid customer debts.

Opting for ‘without recourse’ is safer from your standpoint, as you would not be held liable. However, this choice is likely to come with a higher fee, addressing the lender’s elevated risk.

Certain business owners, trusting that customer non-payment is an infrequent occurrence, may opt for ‘with recourse’ invoice finance to lower their ongoing costs.

Single invoice financing

Businesses engaged in long-term contracts and substantial projects may choose single invoice factoring as their preferred facility. In this approach, a solitary significant invoice, rather than the entire sales ledger, is sold to the finance lender, providing a level of certainty regarding the availability of working capital.

Industries with ‘non-standard’ operating methods, such as construction, may find single invoice finance advantageous. They can plan ahead, using the conclusion of the next project as a milestone for the influx of cash.

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Which types of businesses might benefit from invoice funding? 

The nature of each individual company determines whether invoice factoring or discounting is the more suitable invoice finance option. However, the overarching theme in this type of lending is its flexibility and low risk for both the lender and the borrower.

Industries that stand to benefit from invoice factoring and discounting, in general, include manufacturing, engineering, transport, and construction. Nevertheless, the advantages are evident for any business with a relatively stable sales ledger.

Vanguard Insolvency has affiliations with a diverse range of invoice finance lenders throughout the UK and can connect you with the most suitable option for your business. If you have faced rejection for commercial finance, call today to discuss your financial needs.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.