Late Payments Are Still Hurting UK SMEs: How Invoice Finance Can Help
Late-paying customers remain one of the biggest cash-flow challenges facing UK SMEs.
A business can be profitable, growing and winning new customers while still struggling to meet payroll, supplier payments and other commitments because too much cash is sitting in unpaid invoices.
More than 1.5 million UK businesses are affected by late payments, and the wider economic cost runs into billions of pounds each year. Business owners also lose significant amounts of time chasing money for work they have already completed.
The problem is particularly frustrating because the money technically belongs to the business already. The sale has been made. The product has been delivered or the work completed. An invoice has been raised. The company is simply waiting to be paid.
This is where invoice finance can become valuable.
Instead of waiting 30, 60, 90 days or longer for customers to settle invoices, eligible businesses can potentially release a percentage of the value of approved invoices shortly after they are raised.
That can turn outstanding invoices into working capital and give a growing business greater control over cash flow.
In this guide, we explain how invoice finance can help businesses manage late payment, how factoring differs from invoice discounting, what lenders look for and when another type of business funding may be more suitable.
Important: We do not publish definitive rates. Availability and terms depend on lender criteria, documentation, debtor quality, invoice quality and the structure of the facility.
Why late payments are such a problem for UK SMEs
Late payment is much more than an administrative inconvenience.
For a small or medium-sized business, an unpaid invoice represents money that cannot yet be used elsewhere.
That money might otherwise have funded:
- Payroll
- Supplier payments
- VAT
- Corporation Tax
- Stock
- Materials
- Recruitment
- Marketing
- New contracts
- Equipment
- General working capital
The longer invoices remain outstanding, the more pressure can build.
This becomes especially difficult when the business itself has short payment obligations but its customers demand long terms.
A company might need to pay employees monthly and suppliers within 30 days while waiting 60 or 90 days to receive payment from customers.
The business is effectively funding that gap itself.
If turnover increases, the problem can actually become larger rather than smaller because more cash becomes tied up in the sales ledger.
This is one reason profitable businesses can experience cash-flow pressure while appearing healthy on paper.
Why profitable businesses can still struggle with cash flow
One of the most important distinctions in business finance is the difference between profit and cash.
A business records revenue when it makes a sale, but that does not necessarily mean the customer has paid.
Imagine a business completes £150,000 of work during a month and invoices its customers on 60-day terms.
The accounts may show strong revenue.
However, the company still needs cash immediately to cover:
- Staff wages
- Materials
- Subcontractors
- Premises
- Utilities
- Insurance
- Tax
- Other operating costs
If customers then pay later than agreed, the gap becomes even wider.
This can create a situation where a business is profitable on paper but short of available cash.
The issue can become more pronounced during periods of rapid growth because the company is issuing more invoices while also needing more money to fulfil new orders and contracts.
That is why growth and cash-flow pressure can often appear at the same time.
Invoice finance can help address this mismatch by releasing cash against approved invoices rather than forcing the business to wait for customers to pay.
What is invoice finance?
Invoice finance is a form of business funding that allows a company to release cash tied up in unpaid customer invoices.
Instead of waiting for customers to pay under normal credit terms, the business can potentially access a percentage of the value of eligible invoices shortly after they are raised.
When the customer eventually pays, the remaining balance is released to the business, less the applicable charges.
The exact structure depends on the provider and facility type, but invoice finance is commonly used by businesses that sell to other businesses on credit terms.
It can be particularly useful where customers typically pay on:
- 30-day terms
- 60-day terms
- 90-day terms
- End-of-month terms
- Longer contractual payment cycles
The key benefit is that the business does not necessarily have to wait for the full payment period before accessing cash.
This can turn the sales ledger into an ongoing source of working capital.
How invoice finance helps with late-paying customers
Invoice finance does not make customers pay faster.
What it can do is reduce how dependent the business is on waiting for those customers to pay.
Once an eligible invoice has been raised, the business may be able to draw a percentage of its value under the facility.
This can provide cash for day-to-day operations while the invoice remains outstanding.
For example, rather than waiting 60 days for a £50,000 customer invoice to be settled, an eligible business may be able to release a substantial proportion of that value much earlier.
The resulting cash can then be used for:
- Payroll
- Suppliers
- Stock
- Materials
- New contracts
- Recruitment
- VAT
- Corporation Tax
- General working capital
This can make cash flow more predictable and reduce the disruption caused by late payment.
It can also reduce the need to delay purchases or turn down work simply because customers have not yet paid previous invoices.
How does invoice finance work?
The exact process varies between providers, but a typical invoice finance facility works broadly as follows.
1. The business completes the work
The company supplies goods or services to an approved business customer.
2. An invoice is raised
The customer is invoiced under the agreed payment terms.
3. The invoice is submitted to the facility
The business uploads or reports the eligible invoice to the invoice finance provider.
4. A percentage of the invoice becomes available
Subject to the facility terms, the business can draw an agreed percentage of the invoice value.
5. The customer settles the invoice
When the customer pays, the remaining balance is released to the business after the applicable charges have been deducted.
This cycle can repeat as new invoices are raised.
As a result, the amount of funding available can grow alongside the company’s sales ledger.
This is one of the reasons invoice finance can work particularly well for expanding businesses.
Invoice factoring vs invoice discounting
Two of the most common forms of invoice finance are invoice factoring and invoice discounting.
Both can release cash from unpaid invoices, but the way the facility is managed is different.
Invoice factoring
With invoice factoring, the finance provider usually takes a more active role in managing the sales ledger and collecting payment from customers.
The arrangement is normally disclosed, meaning customers are aware that a factoring company is involved.
Factoring can suit businesses that want to:
- Release cash from invoices
- Outsource credit control
- Reduce time spent chasing customers
- Improve visibility over debtor management
For smaller businesses or companies without a dedicated credit-control team, this can be particularly useful.
Invoice discounting
With invoice discounting, the business usually continues to manage its own customer relationships and credit control.
The facility can often operate confidentially, so customers may not know that invoice finance is being used.
Invoice discounting may suit businesses with:
- Established finance processes
- Strong internal credit control
- A reliable sales ledger
- A preference to retain direct customer contact
The right choice depends on how much control the business wants to retain and how much support it needs with collections.
Can invoice finance help if customers pay late?
Yes, this is one of the key reasons businesses use invoice finance.
If customers regularly take longer than expected to settle invoices, the business can experience a growing cash-flow gap.
Invoice finance can reduce the immediate impact of that delay by releasing cash against eligible invoices before the customer actually pays.
However, providers will still consider the quality of the debtor book.
They may assess:
- Who the customers are
- How quickly they normally pay
- Whether invoices are disputed
- Whether credit notes are common
- How concentrated the ledger is
- The age of outstanding invoices
- Whether the invoices are valid and enforceable
A customer taking 60 days to pay an agreed 60-day invoice is very different from a customer refusing to pay a disputed invoice that is already significantly overdue.
The quality of the underlying sales ledger therefore remains important.
Why late payments can become worse as a business grows
Growth is usually positive, but it can place additional pressure on working capital.
A company winning more work will often need to spend more before receiving payment.
That can mean:
- More staff
- More stock
- Higher supplier bills
- Additional transport costs
- More subcontractors
- Greater VAT liabilities
- Larger payroll commitments
If the business also offers customers 30, 60 or 90-day payment terms, every increase in sales can increase the amount of cash tied up in debtors.
For example, a company growing from £200,000 to £300,000 of monthly invoicing may appear stronger financially.
But if customers take two months to pay, the amount sitting in unpaid invoices can also increase significantly.
This is sometimes referred to as overtrading: the business is growing faster than its working capital can comfortably support.
Invoice finance can help by allowing available funding to increase alongside eligible invoiced sales.
That can make it particularly suitable for businesses experiencing rapid growth.
Which businesses use invoice finance?
Invoice finance is used across a wide range of UK industries.
It is generally most relevant to businesses that sell goods or services to other businesses and issue invoices on credit terms.
Common sectors include:
- Recruitment
- Manufacturing
- Engineering
- Transport and logistics
- Wholesale
- Professional services
- Security
- Cleaning
- Construction
- Printing
- Food and drink supply
- Business services
The quality of the invoices and customers is often more important than the sector alone.
A provider will typically want to see genuine business-to-business sales where the goods or services have been supplied and the resulting debt is clearly evidenced.
Specialist providers may also consider more complex sectors and invoice structures.
Can construction businesses use invoice finance?
Potentially, yes.
Construction can be more complex than standard invoice finance because payments may involve:
- Applications for payment
- Stage payments
- Retention
- Certification
- Contractual set-offs
- Disputes
However, specialist providers can consider construction businesses where the underlying work, contracts and payment process meet their criteria.
Some providers can also consider uncertified invoices and applications for payment where they have specialist construction finance experience.
This means contractors and subcontractors should not assume invoice finance is unavailable simply because they operate in construction.
The facility needs to be matched to a provider that understands the sector.
Can start-ups and newer businesses use invoice finance?
Potentially, yes.
Invoice finance can sometimes be more accessible to younger businesses than traditional lending because the facility is supported by the company’s invoices and the quality of its customers.
A provider may consider a newer business where there is:
- A strong customer base
- Clear contracts
- Valid invoices
- Relevant management experience
- Good debtor quality
- A credible sales pipeline
A new company supplying established, creditworthy businesses may therefore still have invoice finance options.
The exact structure will depend on the provider and the quality of the sales ledger.
What percentage of an invoice can be funded?
The percentage available depends on the provider, sector, customer quality and facility structure.
Many invoice finance facilities can release a significant proportion of an approved invoice value shortly after it is raised.
The remaining balance is then released after the customer pays, less the applicable fees and charges.
The advance percentage can be influenced by:
- Customer credit strength
- Invoice quality
- Sector
- Payment terms
- Concentration
- Historic bad debts
- Credit notes
- Disputes
A business with a diversified ledger of strong customers may receive different terms from a company heavily dependent on one customer.
This is why a proper review of the debtor book is an important part of arranging invoice finance.
What does invoice finance cost?
Invoice finance pricing varies between providers and facilities.
Costs commonly include:
- A service or administration fee
- A discount or funding charge on money drawn
- Potential arrangement fees
- Additional charges for optional services
The actual price can depend on:
- Annual turnover
- Number of invoices
- Number of customers
- Average invoice value
- Debtor quality
- Advance percentage
- Funding requirement
- Whether factoring or discounting is used
- Whether bad debt protection is included
Price should not be considered in isolation.
A business should also consider what the facility allows it to do.
If releasing cash from invoices allows the company to take on more work, negotiate better supplier terms or avoid turning away opportunities, the commercial value may extend beyond the headline funding cost.
We do not publish definitive rates because pricing depends on lender criteria and the individual facility.
What is bad debt protection?
Some invoice finance facilities can include bad debt protection.
This can provide protection where an approved customer fails to pay because of insolvency or another covered event, subject to the terms and exclusions of the policy.
Bad debt protection can be particularly relevant where:
- The business has a small number of large customers
- A single customer failure would create a significant loss
- The company is expanding into new customer relationships
- Management wants greater protection against debtor insolvency
It is important to understand that protection is subject to conditions, credit limits and exclusions.
It should not be assumed that every unpaid or disputed invoice will automatically be covered.
Can you finance individual invoices instead of the whole sales ledger?
Potentially, yes.
Traditional invoice finance commonly covers most or all eligible invoices within an agreed sales ledger.
However, some providers offer selective invoice finance or spot factoring.
This can allow a business to fund:
- A particular invoice
- A specific customer
- A group of invoices
- Occasional larger transactions
This may suit businesses that do not need a permanent whole-ledger facility.
For example, a company may normally manage cash flow comfortably but win one large contract with a customer paying on extended terms.
Selective funding may allow the business to unlock that particular invoice without moving the entire ledger onto a traditional facility.
Availability and pricing vary considerably between providers.
Invoice finance vs a business loan
Invoice finance and business loans can both improve cash flow, but they work differently.
A business loan provides a fixed amount of capital that is normally repaid over an agreed period.
Invoice finance releases cash from the company’s existing sales ledger and can increase as eligible invoicing grows.
Invoice finance may be particularly suitable where:
- The main problem is slow customer payment
- The company has a strong B2B sales ledger
- Funding needs increase with turnover
- The business wants an ongoing working-capital facility
A business loan may be more suitable where funding is needed for:
- Expansion
- Marketing
- Premises
- Recruitment
- Refinancing
- A one-off working-capital injection
Depending on the requirement, businesses can also explore unsecured business loans or secured business loans.
Some companies use both a business loan and invoice finance because each facility solves a different funding requirement.
Invoice finance vs a revolving credit facility
A revolving credit facility can also provide flexible working capital.
The key difference is what supports the availability of funds.
Invoice finance is linked to eligible unpaid invoices.
A revolving facility provides an agreed credit limit that can usually be drawn, repaid and drawn again, subject to the lender’s terms.
Invoice finance may suit a business where cash-flow pressure grows directly with the sales ledger.
A revolving facility may suit a business that wants access to flexible cash for a wider range of short-term needs.
Some companies may benefit from comparing both structures.
What do invoice finance providers look for?
Invoice finance underwriting is different from standard business lending.
The provider will assess the business, but it will also pay close attention to the quality of the sales ledger.
Typical considerations include:
- Annual turnover
- Trading history
- Customer quality
- Payment history
- Invoice terms
- Debtor concentration
- Credit notes
- Disputes
- Aged debtor position
- Contracts and purchase orders
- Existing finance arrangements
The strongest applications usually have clear documentation and invoices that represent completed, undisputed work.
Providers also want to understand how the business manages credit control and how reliable its customers are.
How to apply for invoice finance
A well-prepared application can help the process move more efficiently.
1. Confirm your funding requirement
Estimate how much cash is currently tied up in unpaid invoices and how much working capital the business needs.
2. Prepare an aged debtor report
This shows outstanding invoices, customer balances and how long each invoice has been unpaid.
3. Gather financial information
Providers may request accounts, management information, bank statements and details of existing facilities.
4. Review the customer base
Large customer concentrations, extended payment terms and historic disputes may influence the facility.
5. Compare factoring and discounting
Decide whether the business wants to retain credit control or would benefit from outsourced collections.
6. Compare suitable providers
Different invoice finance providers have different sector preferences, concentration limits, advance percentages and funding criteria.
Share your turnover, debtor book and funding requirement. We’ll review suitable invoice finance options from our lender panel and help keep the process moving.
Why arrange invoice finance through The Funding Store?
The invoice finance market is broad.
Different providers have different approaches to:
- Sector
- Turnover
- Customer concentration
- Advance percentage
- Contract structure
- Confidentiality
- Credit control
- Bad debt protection
- Start-ups
- Construction
That means the right provider for one business may not be the right provider for another.
The Funding Store works with a wide panel of mainstream and specialist UK lenders.
We can compare options including:
- Invoice finance
- Invoice factoring
- Invoice discounting
- Selective invoice finance
- Spot factoring
- Facilities with bad debt protection
Your dedicated account manager can review the company’s sales ledger, funding requirement and customer profile before identifying suitable providers.
If invoice finance is not the best fit, we can also compare other forms of working-capital funding.
Late payments do not have to control your cash flow
Late payment remains a serious challenge for UK SMEs.
For businesses that offer customers credit terms, the issue is often not a lack of sales or profit. It is the delay between completing the work and receiving the cash.
That delay can place pressure on payroll, suppliers, tax payments, stock purchases and growth.
Invoice finance can help close that gap by allowing eligible businesses to release cash against unpaid invoices rather than waiting for customers to settle them in full.
For the right business, this can create a more predictable source of working capital that grows alongside sales.
Factoring can also reduce the time spent chasing customers, while invoice discounting can provide funding while allowing the business to retain control of its own credit management.
The most suitable structure will depend on turnover, customer quality, payment terms, sector, concentration and the wider funding requirement.
If late-paying customers are tying up cash that your business could be using elsewhere, it may be worth comparing the available invoice finance options.
Apply today and see how quickly we can help you move forward.
Standard disclaimer: We do not publish definitive rates. Availability and terms depend on lender criteria, documentation, debtor quality, invoice quality and the structure of the facility.
FAQs: Invoice finance and late payments
What is invoice finance?
Invoice finance allows an eligible business to release cash against unpaid customer invoices instead of waiting for customers to settle them under normal payment terms.
Can invoice finance help with late-paying customers?
Yes. Invoice finance can reduce the immediate cash-flow impact of late payment by allowing a business to access a percentage of eligible invoices before the customer pays.
How quickly can I access money from an invoice?
Once a facility is live and the required checks have been completed, eligible invoices can often be funded shortly after they are submitted. Exact timings depend on the provider and facility.
What is the difference between invoice factoring and invoice discounting?
Factoring usually includes credit-control support and is normally disclosed to customers. Invoice discounting usually allows the business to retain its own credit control and can often operate confidentially.
Can start-ups use invoice finance?
Potentially, yes. Some providers consider newer businesses where the customer base, contracts, invoices and management experience are strong.
Can construction companies use invoice finance?
Potentially, yes. Specialist providers can consider construction businesses, including some facilities involving applications for payment or uncertified invoices, subject to their criteria.
Can I finance only one invoice?
Some providers offer selective invoice finance or spot factoring, allowing eligible businesses to fund individual invoices or selected customers rather than the entire sales ledger.
What percentage of an invoice can be funded?
The percentage varies by provider and depends on factors including customer quality, sector, concentration, payment terms and invoice quality.
What happens if my customer does not pay?
The outcome depends on the facility and reason for non-payment. Some facilities include optional bad debt protection, subject to credit limits, terms and exclusions.
Is invoice finance suitable for profitable businesses?
Yes. Profitable businesses often use invoice finance because growth and extended customer payment terms can create working-capital pressure even when the underlying company is performing well.
Can I switch from one invoice finance provider to another?
Potentially, yes. Existing facilities can often be refinanced or transferred to a new provider, subject to settlement of the current arrangement and approval by the new provider.
Is invoice finance better than a business loan?
Neither is automatically better. Invoice finance can suit businesses where cash is tied up in unpaid B2B invoices, while a business loan may be more appropriate for a fixed or broader funding requirement.
