Both put cash into the business, but they solve different problems. A loan suits a one-off need with a clear purpose. Invoice finance suits a business that's profitable on paper but short of cash, because customers pay on 30, 60 or 90-day terms.
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You borrow a set amount, say £150,000, and repay it with interest, usually over one to five years. Unsecured loans don't take a charge over a specific asset, although lenders usually ask the directors for a personal guarantee. Secured loans take a charge over property or other assets, so they can go larger and run for longer.
Loans suit spending with a clear start and finish. Think of buying a competitor, fitting out new premises or funding a large stock order ahead of a contract.
The lender advances most of an invoice's value as soon as you raise it. When your customer settles, it pays you the rest, minus its fees. As your sales grow, so does the facility.
It comes in two main forms. With factoring, the lender runs your sales ledger and chases payment, so your customers know you're using it. With invoice discounting, you keep collecting your own invoices and the arrangement stays confidential. Lenders usually reserve it for larger businesses with good credit control.
Invoice finance only works if you sell to other businesses on credit terms. If your customers are consumers, or they pay upfront, it won't fit.
Invoice finance has two main fees: a service fee and a discount rate.
The service fee usually ranges from 0.2% to 2% of your turnover. Where you sit in that range depends on your turnover, how much work the facility involves and how simple your goods or services are. Construction tends to sit at the higher end, because contracts are complex and collecting the invoices is hard if the business stops trading. Temporary recruitment is far simpler, so it usually costs less. The fee is charged as each invoice is assigned, so it moves month to month with your invoicing.
The discount rate is, in effect, the interest rate. How much you can draw depends on the invoice value and the prepayment the lender agrees. You are only charged on the money you actually draw. The charge runs for as long as that money is outstanding, much like an overdraft.
Suppose your business expects turnover of £1m over the next 12 months. The service fee is 1% and the lender prepays 80% of each invoice.
Illustrative only. Fees, discount rates and prepayment levels vary by lender and case.
Start with one question: do you need the money once, or again and again?
If the need is one-off and you can see how the spending pays for itself, a loan is simpler. You know the cost on day one and the repayments don't move.
Some problems keep coming back: customers take 60 days to pay, and payroll won't wait. A loan only covers that for a while. Invoice finance follows the problem, because the more you invoice, the more you can draw.
If you're growing quickly, you may want both: a loan for the one-off spend and invoice finance for day-to-day working capital.
For a loan, expect to provide recent filed accounts, management accounts, business bank statements and details of any existing borrowing. For invoice finance, lenders want an aged debtor report, a list of your main customers and your standard terms of trade. Either way, we check your eligibility with a soft search first, so it leaves no mark on your credit file.
It depends on how much you draw and for how long. Invoice finance charges a service fee of 0.2% to 2% of turnover plus a discount rate on what you draw, while a loan charges interest on the full amount from day one.
With factoring, yes, because the lender collects payment from them. With invoice discounting you collect your own invoices, so it usually stays confidential.
Yes. Many businesses use a loan for a one-off spend and invoice finance for day-to-day cash flow.
We arrange business finance over £25,000. With invoice finance, the amount depends on the value of your invoices and the prepayment the lender agrees, such as 80%.
Not sure which fits? Tell us what the money's for and we'll come back with options. Loans and facilities over £25,000.
Check eligibilityCapito is a broker, not a lender. This guide is general information, not advice on your circumstances.
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