A business that invoices £100,000 a month on 60-day terms has, at any moment, around £200,000 of completed work sitting in its sales ledger. Invoice finance is the mechanism for turning part of that ledger into cash on a continuing basis. The headline idea is simple; the process has more moving parts than most introductions admit, so this page follows it from start to finish.
The cycle in one picture
Whatever the product, the same four parties and flows are involved: your business, your customer, the finance provider and, in most facilities, a trust account that sits between them.
Getting a facility in place
Before any invoice is funded, a provider needs to understand the business, price the risk and put legal protection in place. Five stages are typical.
Eligibility assessment
The provider looks at turnover, the spread and credit quality of your customers, your sector, trading history and the state of your sales ledger. They will ask for recent accounts, an aged debtor list and sample invoices. Businesses selling to other businesses on credit terms, with no single customer dominating the ledger, are the easiest to fund. Our eligibility page lists what is checked.
Proposal and indicative terms
If the business looks fundable, you receive a proposal setting out the advance rate, service fee, discount charge, facility limit, concentration limit, contract length and notice period, plus any arrangement fee. These are indicative until the survey is complete. Compare them using the costs guide.
Survey or audit
A surveyor examines how you raise invoices, prove delivery, handle disputes and credit notes, and keep your books. The aim is to confirm that invoices represent completed, undisputed work and that the ledger ties back to your accounts. Expect them to sample invoices and trace them to purchase orders, delivery notes and bank receipts.
Legal agreement
You sign a facility agreement assigning your receivables to the provider. Most providers also take a debenture over the company and a personal guarantee or warranty from directors. Read the termination, recourse and fee clauses carefully; this is the point to negotiate.
Set-up
A trust account is opened for customer payments. In a factoring facility, customers receive a notice of assignment telling them to pay the provider. Your opening ledger is loaded onto the provider's portal, customer credit limits are set, and the first batch of invoices is verified before the first advance.
Across the market, set-up often takes one to four weeks. Spot and selective products can be faster because there is no whole-ledger survey; large whole-ledger discounting facilities can take longer because the audit is more thorough.
Day-to-day: how funding flows
Once live, the facility runs as a repeating cycle. Each step below happens continuously as invoices are raised and paid.
Upload invoices
You raise invoices as normal and submit copies, usually through the provider's portal or an accounting-software link. Factoring invoices carry the assignment notice.
Verification
The provider checks a sample, or all, of the invoices: delivery evidence, purchase order match, customer credit limit, concentration limit and that the customer is approved.
Advance
An agreed percentage, commonly 70 to 90 per cent, becomes available to draw. Many businesses draw daily; others leave funds undrawn to reduce the discount charge.
Collections
In factoring, the provider's credit controllers send statements and chase payment. In discounting, your own team does this and the provider monitors.
Customer payment and reconciliation
When the customer pays into the trust account, the provider matches the receipt to the invoice, clears the advance and releases the remaining balance to you, less the service fee and the discount charge accrued for the days the advance was outstanding. Part-payments, credit notes and contra charges are posted against the relevant invoices, which is why clean invoicing matters: every unresolved query reduces your availability.
Month-end
Each month the provider issues a statement showing invoices assigned, advances drawn, collections, charges and current availability. Invoice discounting clients also submit a ledger reconciliation and an aged debtor analysis so the provider can confirm that the ledger it is funding matches the one in your accounts. Providers may carry out periodic audits, often quarterly or annually, with a fee for each visit.
Illustrative example One invoice through a factoring facility
- Invoice raised, 60-day terms
- £40,000.00
- Advance drawn on day 1 (85%)
- £34,000.00
- Customer pays on day 55
- £40,000.00 into trust account
- Service fee (1.5% of invoice value)
- £600.00
- Discount charge (base 4% + 3% = 7% a year on £34,000 for 55 days)
- £358.63
- Balance released on reconciliation
- £5,041.37
- Total received by the business
- £39,041.37
Figures are illustrative estimates only and do not represent a finance offer. Base rate, margins and fees vary by provider and over time; the 4% base rate is used only to show the arithmetic.
Recourse, disputes and non-payment
Advances are not gifts. In a recourse facility, if a customer has not paid by the end of the recourse period, commonly 90 to 120 days after the invoice due date, the provider reassigns the invoice to you and either debits the advance from your availability or charges a refactoring fee and keeps chasing. Disputed invoices are normally excluded from funding as soon as the dispute is raised, whatever the recourse terms.
In a non-recourse facility, or a recourse facility with bad debt protection added, the provider absorbs the loss if an approved customer becomes insolvent, subject to the credit limit set for that customer and the policy's conditions. Protection rarely covers disputes or slow payment by a solvent customer. The practical steps are set out in what happens if a customer does not pay.
How the process differs by product
The set-up and funding cycle above describes disclosed, whole-ledger factoring. The main alternatives change specific steps rather than the whole picture.
| Stage | Invoice factoring | Invoice discounting | Selective or spot |
|---|---|---|---|
| Survey | Reviews ledger and invoicing; provider will run collections so examines customer base closely. | More demanding: tests your credit control, systems and reconciliation discipline. | Light or none; the provider underwrites each invoice and customer instead. |
| Customer notification | Notice of assignment sent; customers pay the provider. | Usually confidential; customers pay a trust account in your name. | Often disclosed for the funded invoice only; some products are confidential. |
| Invoices submitted | All invoices to approved customers. | Whole ledger, reported in bulk, often by automated upload. | Only the invoices you choose, one at a time or in batches. |
| Collections | Provider's credit control team. | Your own team; provider monitors ledger ageing. | Usually the provider for funded invoices; you for the rest. |
| Month-end | Provider statement. | Provider statement plus your reconciliation and aged debtor report. | Per-invoice settlement; little or no month-end routine. |
| Contract | Commonly 12 months, 3 to 6 months' notice. | Commonly 12 months, 3 to 6 months' notice. | No long-term commitment; pay per invoice funded. |
The decision between the first two is covered in factoring vs invoice discounting. Selective invoice finance and spot factoring suit businesses with occasional large invoices or those below the turnover a whole-ledger facility normally requires.
A typical timeline
| Stage | Typical timing | What you need to provide |
|---|---|---|
| Enquiry and initial assessment | Days 1 to 3 | Turnover, sector, customer list, how you invoice. |
| Proposal | Days 3 to 7 | Latest accounts, aged debtors, management figures. |
| Survey or audit | Week 2 | Access to invoicing records, delivery evidence, bank statements. |
| Legal documents | Weeks 2 to 3 | Signed agreement, debenture, guarantees, board minutes. |
| Set-up and notices | Weeks 3 to 4 | Trust account mandate, customer contact details, opening ledger. |
| First advance | End of week 4, often sooner | First verified batch of invoices. |
| Ongoing advances | Often within a day or two of verification | Invoices and supporting evidence as raised. |
| Review and renewal | Annually, or at contract end | Updated accounts; terms may be repriced. |
Reporting, reviews and ending the facility
Providers report through an online portal showing the funded ledger, availability, disapproved invoices and charges. You should reconcile this to your own ledger regularly, because errors in either direction affect cash: unapplied receipts reduce availability, and funding against an invoice you have already credited can create an overpayment that must be repaid.
Most agreements run for twelve months and then continue until notice is given. Annual reviews look at your accounts and ledger performance; terms may improve if the ledger has performed well or tighten if concentration has grown or disputes have risen. If you want to leave, you give the contractual notice, repay or collect out the funded ledger, and settle any termination fee. Moving to a new provider can be smoother under the UK Finance inter-member transfer process, which is explained in how to switch invoice finance provider.
Ready to see what a facility might look like for your business?
Tell us about your turnover, sector and customers and your enquiry is passed to a provider who can set out indicative terms.
Frequently asked questions
How long does it take to set up an invoice finance facility?
Set-up often takes one to four weeks from first enquiry to first advance, depending on how quickly information is supplied, whether a survey is needed and how complex the legal documents are. Selective and spot products can be quicker because there is less to review. Timing varies by provider and is never guaranteed.
Do I have to put every invoice through the facility?
With a whole-ledger factoring or discounting facility, yes: all invoices to approved customers are assigned to the provider. With selective invoice finance or spot factoring you choose which invoices or customers to fund, and the rest of your ledger is untouched.
What is a trust account?
A trust account is a bank account, usually in your business name but controlled by the provider, into which your customers pay. It allows the provider to receive customer payments while, in confidential discounting, customers see nothing unusual. Funds in it are held on trust for the provider until reconciled.
What happens at month-end?
The provider issues a statement reconciling invoices assigned, advances paid, customer payments received, charges applied and the current availability. With invoice discounting you also submit a month-end ledger reconciliation and often an aged debtor report so the provider can check its records against yours.
Can I leave the facility before the contract ends?
Usually only by giving the notice set out in the agreement, commonly three to six months on a twelve-month contract, and sometimes by paying a termination fee. Some providers offer rolling or 28-day products. Check the notice and exit terms before signing, and read our guide to switching providers.