The Department for Business and Trade put the cost of late payment to the UK economy at almost £11bn a year in 2025. For an individual business it shows up as a gap between wages going out and customers paying in. Three kinds of funding are routinely used to bridge it: a term loan, an overdraft and invoice finance. The cheapest-looking option on paper is not always the one that delivers the cash.
The options side by side
Invoice finance
- Funds a percentage of each unpaid invoice, typically 70% to 90%.
- Amount available rises and falls with sales.
- Secured mainly on the invoices; personal guarantees common.
- Cost: service fee plus discount charge on funds drawn.
- Factoring adds a credit control service.
Term loans and overdrafts
- Loan: fixed lump sum repaid over one to five years or more.
- Overdraft: agreed limit on the current account, repayable on demand.
- Secured on property, a debenture or personal guarantees; unsecured loans cost more.
- Cost: interest rate (APR) plus arrangement fees.
- Amount fixed at the outset and does not grow with sales.
Working capital: the money a business needs to cover the gap between paying for labour, stock and overheads and being paid by its customers. All three products are working capital tools.
Detailed comparison
| Factor | Invoice finance | Term loan | Overdraft |
|---|---|---|---|
| Amount available | A percentage of unpaid invoices. Grows as sales grow; shrinks if they fall. | Fixed at the start on affordability and security. More means a new application. | Fixed limit, often modest relative to turnover. |
| Security and guarantees | Charge over book debts, often a debenture; directors' guarantees common but usually capped. | Often property, a debenture or a full personal guarantee; unsecured loans cost more. | Usually a debenture and personal guarantees; callable at short notice. |
| Cost basis | Service fee (roughly 0.2% to 3% of turnover) plus discount charge (roughly 1.5% to 5% a year over base rate or SONIA) on funds drawn. | Interest as an APR plus an arrangement fee of around 1% to 2%, on the whole balance whether or not you need it. | Interest on the overdrawn balance, above loan rates, plus an annual renewal fee. |
| Speed | Set-up often one to four weeks; afterwards, funds are often released within a day or two of an invoice being approved. | Days to weeks for online lenders; longer for a bank with security to perfect. | Days to weeks; renewals quicker. |
| Flexibility | Draw what you need; selective products let you pick invoices. Whole-ledger contracts commonly 12 months with notice. | Fixed repayments regardless of trading; early repayment may carry a fee. | Flexible day to day, but the bank can reduce or withdraw the limit. |
| Balance-sheet treatment | Factoring may be treated as a sale of receivables, discounting as secured borrowing, depending on the agreement and accounting standard. | A liability, split between current and long-term. | A current liability, repayable on demand. |
| Effect on credit | A registered charge over book debts; later lenders may need the provider's consent to take security over them. | Adds to gearing; repayments met can strengthen the record. | Persistent use at the limit can concern lenders. |
| Suitability | B2B businesses with creditworthy customers, growing sales and a gap caused by payment terms. | Funding a specific purchase, project or acquisition with returns over several years. | Small, short timing gaps and a bank willing to offer a meaningful limit. |
Choose invoice finance if, choose a loan or overdraft if
Choose invoice finance if
- Your cash gap exists because customers take 30 to 90 days to pay invoices.
- Sales are growing and a fixed sum would be too small within a year.
- You have little property or other fixed security to offer.
- You would value a credit control service or bad debt protection.
Choose a loan or overdraft if
- You need a lump sum for a specific purpose: equipment, premises, an acquisition.
- Your customers pay quickly or by card, so there is no invoice ledger to fund.
- You have security the bank will accept and can get a competitive rate.
- You want a predictable fixed monthly cost for budgeting.
A note on merchant cash advances
A merchant cash advance is a lump sum repaid by taking a fixed percentage of daily card takings. It is marketed to retail and hospitality and is typically more expensive than any of the three products above once the total repayable is converted into an annual cost. A business that invoices other businesses on credit has no card takings to repay it from, so it is rarely an alternative to invoice finance.
Unsure whether your gap is a loan problem or an invoice problem?
Tell us what is causing the shortfall and we will explain whether invoice finance is likely to fit, and if not, what usually does.
Illustrative cost comparison: £1m turnover, £150,000 needed
Assumptions. The business turns over £1m a year, invoicing about £83,333 a month to customers who pay on average 55 days after invoice, so its ledger sits at roughly £150,000, the working capital it needs. Invoice finance: an 85% advance (about £127,500 available), a factoring service fee of 1.2% of turnover, and a discount charge of 7% a year (4% reference rate plus 3%) on funds assumed fully drawn all year. Term loan: £150,000 unsecured over three years at 11% APR with a 1.5% arrangement fee; year one shown. Overdraft: £150,000 limit at 14% a year, 80% used on average, with a 1% renewal fee. Minimum, set-up and audit fees are excluded.
Illustrative example Approximate first-year cost of each option
- Invoice finance: service fee (1.2% of £1m)
- £12,000.00
- Invoice finance: discount charge (7% on £127,500 for a year)
- £8,925.00
- Invoice finance: total, for £127,500 available
- £20,925.00
- Term loan: interest, year one (approx., reducing balance)
- £13,900.00
- Term loan: arrangement fee (1.5%)
- £2,250.00
- Term loan: total, for £150,000 (reducing)
- £16,150.00
- Overdraft: interest (14% on £120,000 average use)
- £16,800.00
- Overdraft: renewal fee (1% of limit)
- £1,500.00
- Overdraft: total, for up to £150,000
- £18,300.00
On these numbers the loan looks cheapest and invoice finance dearest. Three things change the picture. The loan shrinks from the first repayment: by month 12 the business has repaid around £45,000 of capital out of cash flow, while the facility still provides £127,500 and more if sales grow. The invoice finance figure includes credit control, which may replace a part-time credit controller. And the overdraft figure assumes the bank will grant a £150,000 limit to a £1m business with no property security, which is often not the case. Invoice discounting at a 0.5% service fee would bring the invoice finance total to about £13,925, below the loan.
Figures are illustrative estimates only and do not represent a finance offer. Rates, fees, advance percentages and availability vary by lender, provider and circumstances.
Our guide to invoice factoring costs explains the charges the example simplifies, and the factoring calculator lets you test an advance against your own invoices.
Combining the products
A common structure is a term loan for a one-off investment alongside an invoice finance facility for day-to-day working capital, with the bank and the provider agreeing who holds security over what. What rarely works is funding a permanent, growing working capital gap with a fixed loan, which runs out as sales grow, or an overdraft, which the bank sets on last year's figures. Whichever route you take, read what happens if a customer does not pay: a loan still has to be repaid if a customer fails, and so does a recourse advance.
Balance-sheet treatment. How each product appears in your accounts depends on the agreement and the accounting standard you apply. Speak to your accountant before deciding.
Frequently asked questions
Is invoice finance a loan?
Not in the usual sense. With factoring you sell your invoices to the provider; with invoice discounting you borrow against them. Either way the amount available is tied to your unpaid invoices and is repaid as customers pay, not in fixed instalments over a term.
Is invoice finance more expensive than a business loan?
Often, if you compare total annual charges as a percentage of funds used. But the comparison is not like for like: invoice finance usually makes more money available, grows with sales, requires less fixed security and can include credit control.
Will invoice finance affect my ability to get a bank loan later?
It can, because the provider usually takes a charge over your book debts, which a later lender may want as security. It is not a black mark in itself; many businesses run a bank loan alongside an invoice finance facility.
Can I have an overdraft and invoice finance at the same time?
Sometimes, but the bank often holds a debenture that includes book debts, and the invoice finance provider will want those released to it. Many businesses replace an overdraft with invoice finance, or keep a smaller overdraft with the bank's agreement.
What is a merchant cash advance and how does it compare?
A merchant cash advance is a lump sum repaid as a fixed percentage of future card takings. It suits retail and hospitality businesses with card sales, and is generally more expensive than invoice finance. Businesses that invoice on credit usually have no card income to repay it from.