Invoice Finance UK: Factoring and Discounting Explained | AccountingStack

Invoice finance lets a UK business borrow against unpaid customer invoices. The two main types are invoice discounting (you keep collecting from customers; cheaper) and factoring (the lender collects; pricier but takes credit-control work off you). For 2026, typical service charges run 0.1–3% of turnover, plus a discount margin of Bank of England base rate plus 1.75–4.5% on drawn balances. Effective annual costs on drawn funds usually sit between 5.5% and 8.25% for established businesses.

This guide covers how invoice finance works, the differences between discounting and factoring, recourse vs non-recourse, the 2026 cost structure, selective and spot factoring, and how to choose a provider.

How invoice finance works

The core mechanism:

1. You raise an invoice to a customer with standard payment terms (typically 30, 60, or 90 days)
2. You upload the invoice to your invoice-finance provider
3. The provider advances a percentage of the invoice value (typically 80% to 90%) to your bank account, usually within 24 hours
4. When the customer pays, the balance (the “reserve”) is paid to you, less the lender’s fees and interest
5. The cycle continues for each new invoice

Two key variables:

• Advance rate. The percentage the lender will fund up front. Higher advance rates (90%+) are common for established businesses with quality customers; lower rates (70-80%) for newer businesses or higher-risk customer bases.
• Confidential vs disclosed. In a confidential facility (typical for discounting), customers do not know the invoice has been financed. In a disclosed facility (typical for factoring), customers pay the lender directly.

Factoring vs discounting

The two main product types:

Discounting is cheaper because the lender is doing less work. Factoring is more expensive but reduces administrative burden — particularly valuable for small businesses without a dedicated credit-control function.

Recourse vs non-recourse

A second axis of choice:

• Recourse. If your customer fails to pay, you take the loss (you “buy back” the bad debt). Most invoice finance is on a recourse basis as the default.
• Non-recourse. The lender takes the bad-debt risk for approved customers. Premium typically starts at 0.45% of invoice value, added to the service charge.

Non-recourse is effectively bundled credit insurance. Worth considering if your business is exposed to large single-customer concentrations.

2026 cost breakdown

The full cost structure of invoice finance in 2026:

Service charge

The lender’s administrative fee, charged as a percentage of turnover:

• Invoice discounting: 0.2–0.5% of gross turnover
• Factoring: 0.75–2.5% of turnover
• Higher rates apply for smaller turnover, single-invoice, or higher-risk customer bases

Discount margin (interest)

Charged on drawn balances, typically Bank of England base rate plus 1.75–4.5%. With base rate at around 3.75% (verify current Bank of England rate), drawn-fund costs typically run 5.5–8.25% on an annualised basis. Margins are lower for established businesses, higher for newer ones.

Setup and arrangement fees

Range £250 to £5,000+, charged upfront when the facility is opened.

Minimum-fee floors

Most providers set minimum monthly service-charge fees, so a quiet month does not necessarily produce a low bill. Check the floor in any quote.

Other fees

Audit fees (annual or semi-annual), CHAPS or same-day payment fees, refactoring fees on rejected invoices, and exit fees on closing the facility. Read the schedule of charges carefully.

For a wider view of business funding options, compare other UK business loan options.

Selective and spot factoring

A more flexible option for businesses that do not need a full ledger facility:

• Selective invoice finance. Choose which invoices to fund and which to collect normally. Pricing is per-invoice rather than against turnover. Typical 1–3% per invoice flat fee.
• Spot factoring. Fund a single invoice without ongoing commitment.

Providers in this space include Kriya, MarketFinance, Bibby Spot, and similar specialists. Selective products suit businesses with one or two large slow-paying customers, or seasonal cash needs.

Pros and cons

Pros

• Faster cash than waiting on customer payment terms
• Scales with sales — a growing business automatically gets more funding
• No traditional secured-loan covenants (though invoice-finance covenants exist)
• Easier to qualify for than unsecured loans, because the receivables themselves are security

Cons

• More expensive than secured term lending for established businesses
• Customer-relationship impact in disclosed factoring (some customers find it off-putting)
• Covenant risk if your customer mix concentrates or your dilutions (credit notes, returns) rise
• Personal guarantees from directors are usual, even though the receivables are the principal security

Choosing a provider

Five things to check:

1. FCA regulation. Some invoice-finance products are regulated, others are not. Check the regulatory status of your prospective provider.
2. UK Finance member. UK Finance trade-association membership signals adherence to industry standards.
3. Recourse policy. Recourse vs non-recourse, and the credit-decision process for non-recourse cover.
4. Minimum fee floor. Critical for businesses with seasonal or variable turnover.
5. Concentration limits. Most facilities cap how much of your ledger any single customer can represent (often 20%–35% of total). Check the limit and whether it fits your customer mix.

Key takeaways

• Invoice finance lends against unpaid customer invoices — typically 80–90% advance rate
• Two main products: invoice discounting (cheaper, you collect) and factoring (pricier, lender collects)
• Recourse is the default; non-recourse adds bad-debt protection at a premium
• Service charge typically 0.1–3% of turnover; discount margin 1.75–4.5% over BoE base
• Selective and spot factoring suit specific cash needs without an ongoing ledger commitment
• Most facilities require directors’ personal guarantees

Frequently asked questions

What is invoice finance? A funding arrangement where a lender advances 80–90% of the value of an unpaid customer invoice, with the balance paid (less fees) when the customer settles. It accelerates cash flow without traditional secured-loan covenants.

What is the difference between factoring and invoice discounting? In factoring, the lender collects payment from your customers and the arrangement is disclosed. In invoice discounting, you keep collecting payments and the arrangement is usually confidential. Discounting is cheaper but assumes you have strong credit control in-house.

What does invoice finance cost in 2026? Service charges typically run 0.1–3% of turnover plus a discount margin of Bank of England base plus 1.75–4.5% on drawn balances. Effective annualised cost on drawn funds is often 5.5–8.25% for established businesses.

Is non-recourse invoice finance worth the premium? It can be, for businesses with concentrated customer exposure or where bad-debt risk would be material. The premium typically starts around 0.45% of invoice value and effectively bundles credit insurance.

Will my customers know I’m using invoice finance? In factoring (disclosed), yes — they pay the lender directly. In invoice discounting (confidential), no — they pay you as normal. Confidential discounting is the standard product for businesses with established credit control.

(Pricing bands reflect 2026 industry data and vary substantially by lender, business size, and risk profile. Get a current quote before committing.)

Useful resources

UK Finance — Invoice finance industry https://www.ukfinance.org.uk/

Financial Conduct Authority https://www.fca.org.uk/

British Business Bank — Finance Hub https://www.british-business-bank.co.uk/finance-hub