Specialist Invoice Finance for the Building Trades

Invoice Finance Explained

Invoice finance is a form of working capital funding that releases cash tied up in unpaid invoices. Instead of waiting 30, 60 or 90 days for a commercial customer to settle, you draw down most of the invoice value within a day of raising it, and the balance follows once your customer pays. For trade businesses the appeal is obvious. Materials, plant hire and wages all fall due long before the money for the job arrives, and that gap is where most cash flow trouble starts.

We are a finance broker, not a lender. We arrange invoice finance facilities for tradesmen, contractors and subcontractors across the UK by taking your sales ledger, your customer profile and your payment terms to the funders most likely to price them well. This page covers how invoice finance works, how invoice factoring and invoice discounting differ, what a facility costs, and where construction sits, because construction is the one sector where invoice finance behaves differently from the textbook version.

What is invoice finance and how does it work?

Invoice finance is a form of business funding that advances a percentage of each invoice you raise against a commercial customer. The funder releases most of the value straight away, typically 70 to 90 per cent, and holds the remainder until your customer settles. When payment lands, you receive the balance less the agreed fees.

The mechanics are straightforward. You complete the work and raise the invoice as normal, then submit it to the funder. The funder verifies the debt, checks the customer's credit and releases the cash, often the same working day. Your customer pays on their usual terms into a designated account. The facility then resets, so the funding available to you moves in line with your sales ledger rather than being fixed at a number someone set months ago.

That last point is why invoice finance is treated as working capital rather than as a loan. There is no capital repayment schedule and no fixed term to refinance at the end of. The funding is secured against invoices you have already earned, which means a business winning larger contracts sees the facility grow with it. It is one of the few types of business finance that funds growth instead of constraining it, which is why so many businesses use it to smooth cash flow rather than to fix a crisis.

What is the difference between invoice factoring and invoice discounting?

Invoice factoring and invoice discounting are the two main types of invoice finance. The difference between them comes down to who chases the money and whether your customers know a funder is involved.

With invoice factoring, the funder takes over your sales ledger and credit control. They issue statements, chase payment and handle collections, and your customers pay them directly. The service is disclosed, so customers see the funder's name. For a small trade business that is often a benefit rather than a drawback, because outsourced credit control means somebody else spends the afternoon on the phone to a main contractor's accounts department.

With invoice discounting, you keep the ledger and keep collecting. Your customers pay into a trust account in your own name and, under confidential invoice discounting, never learn that a funder sits behind the arrangement. Because the funder is relying on your credit control rather than its own, invoice discounting is usually offered to more established businesses with a proven collections record and reliable management accounts.

Cost follows the work involved. Invoice factoring carries a higher service fee because credit control is included. Invoice discounting is cheaper but expects more of you. We compare both across the funders we work with and quote them side by side, because for plenty of businesses the right answer is not the cheaper headline rate.

Can you finance a single invoice instead of the whole ledger?

Selective invoice finance, sometimes called spot factoring, funds individual invoices rather than your entire sales ledger. You choose which invoices to finance and when, and you pay only on the ones you use.

It suits trade businesses with lumpy cash flow. If nine of your customers pay on time and the tenth is a main contractor sitting on a £60,000 application, there is little sense in committing the whole ledger to a funder. Selective invoice finance lets you draw against that one debt, cover materials and wages for the next job, then step away until you need the funding again.

The trade-offs are real. Advance rates on single invoices can be slightly lower, per-invoice pricing is higher than on a whole-ledger facility, and funders scrutinise the individual customer harder because they cannot spread risk across a range of debtors. There is also less certainty, since approval runs invoice by invoice, so it is not a facility to build a year of cash flow forecasting around. Used for what it is good at, though, it solves a common problem without a long contract attached.

How does invoice finance work for construction contractors?

Construction is the one sector where invoice finance does not work the way the standard product description suggests, and it is worth understanding why before you apply.

Most construction work is not billed on a plain invoice. It is billed on an application for payment, which the client assesses and certifies before any sum becomes due. Funders treat applications differently from invoices for good reason. An application is a claim, not an agreed debt, and it can be reduced by a payment notice, disputed on measurement or cut back for defects. Many mainstream invoice finance providers will not fund applications at all, and those that do usually advance a lower percentage, commonly 60 to 70 per cent rather than the 90 per cent quoted on general business finance pages.

Specialist construction funders take a different view. They underwrite the contract as well as the customer, they understand retention, contra charges and stage payments, and several will fund certified and uncertified applications on separate terms. If you work under the Construction Industry Scheme, the funder will also account for CIS deductions when working out what is genuinely collectable. That is why we place construction ledgers with construction specialists rather than with high street invoice finance desks.

What does invoice finance cost?

Invoice finance is priced in two parts, and comparing quotes on a single number will mislead you.

The first part is the service fee, a percentage of gross turnover put through the facility, usually somewhere between 0.5 and 3 per cent. It covers the funder's administration and, in a factoring arrangement, the credit control and collections work. The second part is the discount fee, charged on the funds you actually draw. It is quoted as a margin over base rate and calculated daily like an overdraft, so if you draw for ten days you pay for ten days.

On top of those, watch the extras: arrangement fees, minimum monthly fees, refactoring charges when an invoice runs past its agreed term, audit fees and termination notice periods. A facility with an attractive service fee and a twelve month notice period can cost considerably more over a year than one priced slightly higher on a rolling monthly commitment.

We ask every lender for the same breakdown so the comparison is genuine. We will also tell you when a business does not need invoice finance at all and would fund its growth better with a term loan or asset finance.

Can subcontractors and smaller trade businesses qualify?

Subcontractors can use invoice finance, and in construction they are among the heaviest users of it, because they sit furthest down the payment chain, wait longest to be paid and carry the worst cash flow as a result.

Funders assess three things, and your own balance sheet is only one of them. First, the customer, because invoice finance is business to business funding and needs commercial customers with reasonable credit rather than domestic householders. Second, the work, which needs to be completed and evidenced with signed timesheets, delivery notes, certificates or a signed application. Third, the ledger, meaning concentration: how much of your turnover sits with a single customer.

A subcontractor billing ninety per cent of turnover to one main contractor can still get funded, but should expect a lower advance rate or a concentration cap. Trading history matters less here than for most business finance. Because the funding follows invoices you have already earned, funders will look at newer businesses, at businesses carrying a county court judgment and at businesses whose accounts do not tell a flattering story. Poor personal credit is not automatically a barrier.

How quickly can a facility be set up and funds released?

A new invoice finance facility usually takes one to two weeks from application to first drawdown. Once it is live, funds against individual invoices are normally released within 24 hours.

Setup involves credit checks on your business and your customers, a review of your sales ledger and, on larger facilities, a short audit of your invoicing and collections process. What the funder needs is rarely exotic: recent management or filed accounts, an aged debtor report, sample invoices with their proof of delivery, and bank statements. Having the aged debtor report ready is the single biggest thing that speeds an application up.

After that, the day to day is quick. You raise an invoice, submit it, and the cash reaches your business account the same or next working day, subject to verification. Where a customer has to confirm the debt, verification is the step that adds time, so keeping your customers' accounts contacts current pays for itself.

Is invoice finance regulated, and how are you protected?

Invoice finance is generally not regulated by the Financial Conduct Authority, because commercial invoice finance is business lending rather than consumer credit and sits outside the regulated perimeter. That surprises people, so it is worth being clear about what protection exists instead.

In practice, most established invoice finance providers are members of UK Finance and sign up to its Invoice Finance and Asset Based Lending Standards Framework, which sets conduct standards and gives clients an independent route to complain. Many funders also belong to banking groups that are regulated by the Financial Conduct Authority and the Prudential Regulation Authority for their other activities.

The practical protection, though, is in the contract. Read the notice period, the minimum term, the recourse position if a customer fails to pay, and whether debtor protection or bad debt cover is included or sold separately. Invoice finance sits alongside asset based lending as a form of commercial funding where the agreement, rather than a regulator, defines your rights. We go through those terms with you before you sign, and we will say plainly when a contract is worse than it looks.