Credit control

Invoice factoring vs invoice discounting: how invoice finance works for UK small businesses

How invoice finance works in the UK: advances of up to 80-90% of invoice value, the difference between factoring and invoice discounting, the fees, and when chasing better is cheaper.

By the Nemexio team · 6 November 2026 · 6 min read

How invoice finance works

You assign some or all of your outstanding customer invoices to a finance provider. The provider pays you an advance, typically up to 80 or 90% of their value, and releases the remaining balance, less its fees, when your customer pays ^[1].

Because the funding is secured on what your customers owe, it can be available when other lending is not ^[1]. UK Finance members provide well over £20 billion of invoice finance and asset-based lending to UK businesses at any one time ^[2].

Factoring

The provider manages your sales ledger and collects payment from your customers ^[1].
Your customers usually know you use a factor ^[1].
Higher service fees, because credit control is included ^[1].
Generally easier for smaller businesses, often those with turnover up to around £2 million ^[1].

Invoice discounting

Finance only: you keep your own credit control ^[1].
Often undisclosed, so customers keep paying you directly ^[1].
Lower service fees, more often used by established businesses ^[1].

What it costs

Expect a service fee, a percentage of the invoices financed, plus a discount charge on the money you draw ^[1]. Check also minimum terms, notice periods, exit fees and whether the facility is 'with recourse', meaning you repay the advance if your customer never pays.

Compare the total yearly cost with the problem you are solving. If customers pay 20 days late on average, faster chasing may release the same cash without a facility.

Before signing: fix collection first

Invoice finance pays you earlier; it does not make customers pay. A provider will look closely at your debtor book: clean records, clear payment terms and a steady reminder process improve both the advance rate and the price.

Automatic reminders from the due date, with a simple way to pay, are a low-cost first step. Many businesses find they no longer need the facility once their average payment time falls.

Frequently asked questions

What is the difference between factoring and invoice discounting?

With factoring the provider collects from your customers and manages the ledger; with invoice discounting you keep collecting yourself, often confidentially ^[1].

How much can I borrow with invoice finance?

Typically up to 80 or 90% of the value of the invoices assigned, depending on the provider's risk criteria ^[1].

Will my customers know?

With factoring they usually do. Many invoice discounting facilities are undisclosed ^[1].

Is invoice finance a loan?

It is a form of secured funding: the provider advances money against invoices you assign to it, then is repaid when your customers pay ^[1].

Put this into practice

FeatureAutomatic remindersA Tier 1 chasing a client does not use the same voice as a sole trader chasing a Tier 1. Nemexio writes the sequence for your position in the chain and for the document you are chasing, so you never send the wrong letter.SolutionAccounts receivable automationAutomate invoice follow-up from Xero, QuickBooks, Sage or FreeAgent: reminders in your name, statutory interest worked out, and chasing that stops when you are paid.IntegrationXero remindersYour open invoices are refreshed every week.

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Sources

Sources checked on 6 November 2026. This article is general information, not legal advice. For a specific contract or dispute, take independent advice.