Invoice Financing is short-term funding in which a business borrows against its unpaid customer invoices, receiving most of their value upfront instead of waiting 30 to 90 days for payment. Unlike factoring, the business usually keeps control of its sales ledger and collects from customers itself, and invoice discounting is typically confidential. The lender sets an advance rate and a facility limit based mainly on debtor quality, takes customer payments into an account it controls, then deducts the advance and fees and releases the balance. Facilities can be recourse or non-recourse. Lenders verify debtors and cap concentration in single customers, and in the UK the 2018 assignment regulations made most contractual bans on assigning receivables ineffective.
How does invoice financing work
The lender sets an advance rate, the share of each approved invoice it will fund, and a facility limit based mainly on the quality of the debtors rather than the borrower's own credit. When a customer pays, the money goes to an account the lender controls; the lender deducts the advance and its fees and releases the balance to the business.
Illustrative example: a wholesaler issues £100,000 of invoices on 60-day terms. With an 85% advance rate it receives £85,000 the next day. If the lender charges a 0.5% service fee on invoice value plus 1.5% a month on funds drawn, the cost over two months is £500 plus £2,550, or £3,050, and the wholesaler receives the remaining £11,950 when its customer pays.
Invoice financing vs factoring
Invoice discounting, the most common form of invoice financing, is usually confidential: customers do not know a lender is involved. Factoring is disclosed, with the factor's payment details printed on the invoice. Both can be recourse, where the business repays the advance if a customer fails to pay, or non-recourse, where the financier takes the credit loss in exchange for higher fees, often backed by credit insurance. Selective or spot facilities fund individual invoices instead of the whole ledger and suit firms with lumpy, high-value contracts.
Why UK rules made receivables easier to finance
Many supply contracts used to ban the supplier from assigning its receivables, which blocked lenders from taking them as security. The Business Contract Terms (Assignment of Receivables) Regulations 2018, in force since 24 November 2018, make such bans ineffective in contracts entered into on or after 31 December 2018, provided the supplier is not a large enterprise. Contracts for prescribed financial services, land and the sale of a business are excluded, so lenders still review the main customer contracts before funding.
Underwriting and fraud controls
Because the security is the invoice, lenders test whether it is real. They verify debtors, sample proof of delivery and watch for credit notes or heavy reliance on one customer; a single debtor making up 40% of the ledger is normally given its own lower cap. Fintech platforms connect to accounting software to pull invoices automatically and price each one using payment histories and other alternative data, which allows same-day funding of individual invoices.
What it means for buyers of invoice finance platforms
For an acquirer, the numbers that matter are dilution (the share of invoice value lost to credit notes and disputes), debtor concentration, bad debt by cohort and the terms of the platform's own funding lines. Invoice finance to limited companies sits outside the FCA's consumer credit perimeter, so value rests on the underwriting record and committed funding rather than on a licence.