What is Invoice Finance? How Does it Help Businesses?

You are a business owner, and you are struggling to commit to your expansion. As far as the nature of your business is concerned, invoices are part of what’s keeping your business from getting bigger. It is something you as a business owner must always take into account: that some business owners cannot pay in cash immediately because they lack the liquidity. And since you cannot pressure your other business owners to pay faster because it may strain your relationship with them, a good way for you to let them prioritise you is to give them a quick and warm reminder, whether through a call, letter, or email. 

Sadly, there is also this risk of not getting paid, and your business will eventually face a lower return rate than usual. But how does Invoice Finance help businesses to stay afloat or even expand their businesses?

​Invoice financing is a financial tool that allows businesses to access more funds by using their unpaid invoices from their clients as collateral. This is a business strategy of many businesses across the UK and can be beneficial for business owners who are looking to improve cash flow without waiting for clients/customers to pay their invoices.

Table of Contents

1. Introduction
2. Key Takeaways
3. What Is Invoice Financing?
4. How Does Invoice Financing Work?
5. Benefits of Invoice Financing
6. Disadvantages
7. Expert Opinions on Invoice Financing
8. What Business Industries Use Invoice Financing
9. It Helps Your Business Grow
10. FAQ’s

Key Takeaways

• Invoice Financing is a short-term solution for businesses.
• There is no need for additional collateral since the unpaid invoices act as collateral, and quick turnaround of customers helps get approved.
• Understand the agreement carefully.
• The lender may take over with chasing payments, which will impact customer relationships.
• Only suitable for B2B.

What Is Invoice Financing?

Invoice financing is a form of short-term borrowing where businesses use their outstanding invoices as collateral to obtain funds from a lender. This approach enables companies to receive a significant portion of the invoice value upfront, improving cash flow and allowing for more flexible financial management.​

How Does Invoice Financing Work?

The process of invoice financing typically involves the following steps:​

1. Issuing Invoices

 The business (you) provides goods or services to customers and issues invoices with payment terms, often ranging from 30, 60, 90, or EOM (end of month)

2. Financing Application 

The business approaches an invoice financing provider and submits the unpaid invoices for consideration.​

3. Advance Payment

The provider advances a percentage of the invoice value, usually between 70% and 90%, to the business.​

4. Customer Payment

The customer pays the invoice amount directly to the financing provider according to the original payment terms.​

5. Final Settlement

Once the customer pays the invoice, the provider releases the remaining balance to the business, minus any fees or interest charges.​

Benefits of Invoice Financing

Utilising invoice financing can offer several advantages for businesses:​

• Improved Cash Flow: Accessing funds tied up in unpaid invoices allows businesses to maintain steady cash flow, essential for daily operations and growth initiatives.​
• Flexible Financing: Invoice financing is adaptable to the business’s sales volume, with funding amounts increasing as sales grow.​
• No Additional Collateral Required: The invoices themselves serve as collateral, eliminating the need for additional assets to secure financing.​ (Funding Bay)
  
• Quick Access to Funds: The application and approval process for invoice financing is typically faster than traditional bank loans, providing timely financial support.​

Disadvantages

While invoice financing offers notable benefits, it’s important to consider potential drawbacks:​

• Cost: Fees and interest rates associated with invoice financing can be higher than those of traditional financing options, impacting profit margins.​
• Customer Relationships: In some arrangements, the financing provider may interact directly with customers for payment collection, which could affect client relationships if not managed carefully.
• Qualification Criteria: If you have customers or clients that are paying well, then there is a good chance availing will be quicker. If otherwise, then chances of getting approved are low or even of getting rejected.

What Business Industries Use Invoice Financing

According to ukfinance.or.uk invoice finance is being considered by many businesses across the UK to acquire quick funding and is a growing industry in the UK

In 2025, there are about 35,000 businesses in the UK getting support from UK Finance’s Invoice Finance (IF) and Asset-Based Lending (ABL) members. These members are lending over £20 billion at any given time, which adds up to around £120 billion in total funding every year. In 2023, businesses using IF and ABL products had a total income of more than £316 billion. Across Europe, in 2023, the industry supported businesses with a combined turnover of almost €2.5 trillion.

UK Finance’s IF/ABL members include big UK commercial banks, specialist banks, and international banks, as well as non-bank finance providers. UK Finance helps by representing the industry to policymakers, politicians, and other important people, while also offering education and expert advice. They also have an independent Standards Framework that makes sure businesses using invoice finance or asset-based lending from UK Finance members gets the best service possible.

It Helps Your Business Grow

Invoice financing is a good option, especially if you need quick cash but don’t know where to get it and you have a lot of invoices yet to collect from your customers since you can’t really force them to pay right away. Although it’s not perfect since it has its own drawbacks, it is something that is something to be considered if you are looking for a short-term solution.

If the customers are always paying on time, then this is recommended for businesses, but if you know your customers aren’t, then this is not for you.

FAQs

1. What is the main purpose of invoice financing?
Invoice financing helps businesses access cash quickly by using their unpaid invoices as collateral instead of waiting for customer payments.

2. How much can I get through invoice financing?
70-90% of the invoice value upfront, and the rest is after the customer pays minus fees.

3. Will my customers know I’m using invoice financing?
In invoice factoring, customers may know since the lender handles collections. With invoice discounting, customers are often unaware.

4. Is invoice financing expensive?
It can be more expensive than traditional loans. Fees vary depending on the lender and the creditworthiness of your customers.

5. How long does it take to receive funds?
24-28 hours after approval.

6. Can startups use invoice financing?
Yes.

7. What happens if a customer doesn’t pay the invoice?
The business (you) remains responsible for the unpaid invoice. In non-recourse factoring, the lender takes the loss.

8. Are there alternatives to invoice financing?
Yes, alternatives include business lines of credit, small business loans, or merchant cash advances.

9. Is invoice financing suitable for seasonal businesses?
Yes.