Invoice Finance: Everything You Need To Know

Everything you need to know about invoice finance

Updated: June 13, 2024
Matt Crabtree

Written By

Matt Crabtree

CompareBanks is reader-supported. When you click through some links on our site, we may earn an affiliate commission. Learn more

Invoice finance is many companies’ secret weapon, and not everyone has caught on to exactly what it is and what opportunities it opens up.

That means that if you’re able to make invoice financing a part of your overall strategy in a way that makes it work for you, you’ll have a leg up on the competition. And luckily for you, we’re here to tell you everything you need to know.

Let’s get started by explaining what invoice financing — also known as receivables finance, invoice factoring and invoice discounting — actually is. It’s effectively a catch-all term used in finance circles to refer to different types of loan that use invoices as a basis, and what’s so exciting about it is the fact that it provides a new way to unlock working capital.

It essentially allows businesses to transfer their invoices to another company in exchange for part of the value of the invoice up front. Suddenly, there’s no need to wait until the invoice is actually paid. As soon as the order comes in you can start to reinvest the money. It frees you up to do so much more.

How Does Invoice Finance Work?

The basic concept behind invoice finance is pretty simple. The aim is to free up some of the money that’s due to come your way from unpaid invoices so that you have an improved cash flow available to you. You have to spend money to make money, but you can’t spend it if you can’t access it.

That’s why invoice finance is so popular — because it’s faster than taking out a bank loan and safer than alternatives like payday loans and quick cash schemes.

Invoice financing, then, is effectively a service offered by some companies in which your outstanding invoices can be converted into cash. They do this either by directly purchasing invoices or by using them as security against a more traditional loan.

Some companies will even help you to chase up your invoices because they know that if you get paid, so will they. When these services are offered, they’ll typically take a commission from each of the invoices as they’re paid and/or they’ll charge interest on the money that they loan you.

One of the big benefits of invoice financing is that it can often be processed more quickly than other sources of funding. Many providers can deliver funds within 24 hours, making it a short-term option to cover cash flow issues as well as a longer-term approach when you want to reinvest trapped funds to grow your business.

What You Need to Know

One of the most underrated advantages of invoice finance is the fact that it allows people to access finance that’s already coming their way instead of having to follow more risky routes to find funding.

For example, a traditional loan might use existing assets as collateral, and you risk losing that collateral if you fail to make repayments. The worst case scenario is that a failure to pay could result in bankruptcy.

Most business people would prefer to avoid that risk where possible, and while invoice finance isn’t totally risk-free, it’s better than many other options. But it does come with its downsides, the most obvious of which is the fact that it can lead to a loss of control. After all, you’re giving another company access to your invoices, one of the most important assets that your company has.

Some invoice financing companies will even start chasing invoices on your behalf, which is fine if clients pay up without a problem but which can damage relationships and even lead to clients taking their business elsewhere. But even if that happens, you could argue that if your clients need that much chasing before they pay you then you’re better off without them in the first place.

When to Use Invoice Financing

As a general rule, we’d advise against relying too heavily on invoice financing because it works best when it’s kept in reserve for when you really need it. Instead of using it as a matter of course and being left with no backup, you can bring it in when you need to pay your employees or settle up with your suppliers.

It can even come in useful if you need to invest in some new machinery or to upgrade your equipment or facilities. It’ll give you that short-term cash boost you need to make things happen.

Of course, the downside of this type of financing is that you’ll pay a certain amount of money to the provider, usually in the form of a percentage of each invoice amount. If you rely on it too often then you’ll need to accept the fact that you’ll be routinely siphoning off your profits to give a cut to the company that’s providing the finance.

Still, the cut that you’ll pay is typically lower for invoice financing than for other types of financing because there’s much less risk involved for the lender. They know that it’s only a matter of time until the invoices are paid and the money comes in, so they can take a lower cut as a result of it. It’s win/win for all parties.


Invoice financing isn’t for everyone, but it can work pretty well for a short-term cash infusion in a variety of different situations.

Used correctly, it can give your business that extra little push it needs to grow at scale. Instead of saying no to opportunities because you don’t have the cash you need to make them a reality, you can use invoice financing to free up some money to reinvest in your business.

Just make sure that you don’t rely too heavily on invoice financing. Be careful not to overstretch yourself by investing too much too quickly until your company is like a house of cards with too much weight at the top.

It’s much better to grow sustainably, and invoice financing can be a great way to do that. Good luck.

Related Guides:

Related Articles

New tax rates for 2024/25
From your personal allowance to inheritance tax, everyone in the UK is taxed at...
10 Best Joint Bank Accounts with Benefits in the UK
10 Best Joint Bank Accounts with Benefits in the UK
There are many reasons for having a joint bank account. Whether you’re living with...
What Bank Details Are Needed to Receive Money?
You must always check with the sender what bank details are needed. But you can...
Best Business Current Accounts
If you own a small company, whether it's just starting out or is well-established,...