How does invoice finance work for a UK business?

Full answer

Invoice finance is a way for a business to unlock cash tied up in unpaid sales invoices instead of waiting 30, 60, or 90 days for customers to pay. It is widely used by businesses that sell to other businesses on credit terms. There are two main forms. Invoice factoring: you sell your invoices to a finance provider, who advances a percentage upfront and then takes over collecting payment from your customers (so your customers know the facility is in place). Invoice discounting: you keep control of your own credit control and collections, and the arrangement is usually confidential, so customers deal only with you. How the mechanics work: you raise an invoice, the lender advances a percentage of its value (commonly 80-90%), and you receive that cash quickly. When your customer pays, the lender releases the remaining balance to you, less its charges. Charges usually combine a service fee (a percentage of turnover) and a discount/interest charge on the funds drawn. Worked illustration of the cash mechanism: on a GBP 10,000 invoice with an 85% advance, you would receive GBP 8,500 upfront. When the customer pays the full GBP 10,000, you get the remaining GBP 1,500 minus the lender's fees. Who it affects: B2B businesses with strong order books but slow-paying customers - common in manufacturing, recruitment, and wholesale. It is generally not suited to businesses that sell mainly to consumers or for cash. A 2026/27 reminder: invoice finance is a funding facility, not a tax product, but the VAT on a sale is due to HMRC according to your normal tax point rules regardless of when the customer actually pays you. With the VAT registration threshold at GBP 90,000, growing businesses should plan VAT cash flow alongside any facility. Fee rates vary by provider, so use the relevant calculators to model your VAT and trading position.

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