Invoice Finance or An Overdraft – What’s Right For Your Business?

By 02.28.23March 10th, 2023No Comments
Invoice Finance or An Overdraft – What’s Right For Your Business?

The adage “Cash is King” is a well-used saying but in times of economic uncertainty it should be uppermost in the mind of any forward-thinking business. When looking to improve cashflow UK businesses will naturally think of the traditional, more favoured route of a bank overdraft from its own or recommended lender. But taking this easier option could mean that they overlook many alternatives and eminently viable finance options that could deliver real benefits to their business. but also, opportunities to grow.

Invoice Finance is an increasingly popular working capital option being used by UK businesses to provide their businesses with a flexible, easy to use, source of funding. The team here at eCapital explain the difference between invoice finance and the traditional bank overdraft.

Businesses not wishing to add further debt could consider Invoice Finance as a viable alternative as it uses their “own cash” tied up in outstanding invoices.

But what is it and how much will it cost?

Here we demystify Invoice Finance and explain what it is and what you need to know before making a cashflow decision.

Invoice Finance

Suitable for all?

Firstly, Invoice Finance is only available to businesses who sell to other businesses offering credit terms and therefore raise an invoice. Funding is provided against invoices raised. So, no invoice no funding.

What is it?

When a firm uses Invoice Finance, it “sells” its product/service to its customer as normal.  When they raise the invoice and send it to their customer, they send a copy to the Invoice Financing company who will then make available a percentage of the value of that invoice to the business to use as a cash injection.

In addition, the Invoice Financing company can undertake the credit control on your behalf and collect payment of your invoices from your customers, when due.

How does it work?

The amount made available is normally up to 85%* (the Initial Percentage or IP) of the value of the invoice. It can however range from 80% to 100% dependent on the funder.  Don’t be swayed by the higher percentage as the actual amount you receive may vary – we discuss this later.

Once invoice payment is received from the customer, the invoice financier will repay the final 15% * minus its fees.

Essentially you are gaining access to the money due to you (in your invoice) without waiting for your customer to pay – speeding up the flow of funds into your business.

Normal credit terms offered on your invoice may be 30 days from date of invoice but, firms in the UK can delay payment with some firms reporting delays of between 60 – 90 days.

For example, if you are owed £500,000 by your customers, Invoice Finance can release up to £425,000 within 24 hours instead of waiting for 30, 60, 90 or 120 days to be paid.

The remaining £75,000 will be paid to you minus the agreed fees when your customer pays. So, unlike an overdraft, it provides an excellent source of cashflow to put to work in your business immediately.

The Benefits

  • Negotiate better discounts – with improved cashflow you can use it to your advantage by negotiating better supplier payment terms.
  • Invest in your business – you can use the improved cashflow to invest in your business – whether that be additional salespeople, new vehicles or increased marketing activity.
  • Peace of mind – Having a certainty of cashflow can provide a business with the funding peace of mind to move forward with confidence.
  • Ongoing supply of funding – the more you sell, the more invoices your business can raise and therefore the more potential funding is made available to you.
  • No renegotiations – because funding is based on the invoices you raise there is no need to renegotiate when you need additional funding.
  • Saves time – by outsourcing your invoice collection to the invoice finance provider it can save you valuable time which can be deployed on other more productive tasks.

What is the commitment?

Normally you would sign up to an invoice finance facility for a year, but some funders will look to sign you up for 2 years which not only gives them commitment but also provides you with the certainty of a longer-term funding arrangement. Termination clauses do exist in all contracts so it is worth checking these before any decision is made.

Business Overdrafts

Business Overdrafts are available to all businesses no matter size or sector and you normally apply for a business overdraft through your bank.  It is essentially a facility that allows you to access a pre agreed amount of funding as you need it.

Most overdrafts are based on a percentage of the value of assets that the business owns as well as how the business has historically performed.  For new start businesses, a robust business plan forecasting first year turnover would be required.

Banks usually ask for collateral to secure the overdraft against – this could be a home or a business premises.

A negative aspect of overdrafts is that they can be withdrawn by the Bank without notice which means you would need to pay back any money you have borrowed.

What is the commitment?

Most overdrafts are set up on an annual agreement which means that you must renegotiate terms with the bank every year which incurs a fee and potentially a change to your facility.

You should be aware that if you exceed the pre-agreed level of an overdraft then you could be liable for extra charges and penalties.

Comparing Invoice Finance with a Business Overdraft


Invoice Finance provides more flexibility because the more you sell the more invoices you raise and the more cash is made available to you. It is a cashflow facility that grows exponentially.

An overdraft has an agreed formal limit which if this becomes insufficient for your needs would mean a renegotiation with your bank. A bank’s decision making is guided by strict lending criteria based these days around algorithms and appropriate credit scoring. If you have any adverse data that may affect this process, then it is likely that your application/request could be rejected.

Invoice Financiers however are more concerned with the creditworthiness of you and your customers ,rather than what assets you have for collateral or your credit history.


With Invoice Finance your invoice is the collateral. The creditworthiness of your customers is key. An overdraft may require a charge over property or equipment.


Invoice Finance has two headline fees and therefore can look more expensive, but you are not comparing like for like as Invoice Finance may include a bespoke sales ledger management and invoice collection service. The two fees can be broken down as follows:

  • The cost of the finance you use which generally varies between1.5% and 5% above Bank of England base rate. Broadly speaking, the higher the value of invoices, the lower the rate will be.
  • In addition, there is a fee for the service they provide – which can be up to 3% of gross invoice value and this will depend on a number of factors relating to your business and industry sector. But compare this to the cost of running your own inhouse credit control function.

You should consider how much flexibility you need with your funding when considering which solution is the best match for your business.

An Overdraft may initially cost less than Invoice Finance on the face of it as you will only see the interest rate agreed which may be lower. However, if you exceed the amount of agreed borrowing then charges will be higher, and you risk the chance of the overdraft being withdrawn.  Also be aware of renegotiation charges which you may get charged.

Whatever option you choose, Invoice Finance or Business Overdraft; ensure that you read the terms and conditions and fully understand the process.

In general, an Invoice Finance funding solution can be put in place in shorter time period than a bank overdraft.

eCapital Commercial Finance offers flexible invoice factoring solutions designed to help improve business cashflow. For more information call us on 0800 007 3080.

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