What is Invoice Finance?

Full Definition

Invoice finance is a way for UK businesses to release cash tied up in unpaid sales invoices rather than waiting for customers to pay. A finance provider advances a percentage of an invoice's value - often around 80-90% - shortly after it is issued, with the balance (less fees and interest) paid once the customer settles. The two main types are invoice factoring, where the provider also manages credit control and chases payment, and invoice discounting, where the business retains control of its own ledger and the arrangement can be confidential. It is commonly used by firms with long payment terms to smooth cash flow and fund growth. Costs include a service fee and a discount charge on the advance, so the effective cost can be higher than a traditional overdraft. Invoice finance is regulated lightly compared with consumer credit, and VAT still applies to the underlying sale, so businesses must account for output VAT in the normal way regardless of when finance is drawn.

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