Should a small business use invoice finance or just chase harder
By InvoiceReminder Editorial Team · Published 6th August 2026
Waiting for clients to pay is one of the most stressful parts of running a small business in the UK. A healthy order book means nothing if the cash isn't in the bank, and this constant cash flow gap forces many founders to a difficult crossroads: should you sell your invoices to a finance company to get cash now, or should you double down on chasing overdue payments yourself, at the risk of damaging client relationships?
This isn't a simple choice. On one hand, invoice finance promises immediate relief from cash flow pressure. On the other, a robust in-house credit control process gives you full control and can be far more cost-effective. This article weighs the true costs and benefits of both paths, helping you decide whether to pay factoring fees or invest your time in chasing harder—and smarter.
What is Invoice Finance? A Quick Primer
Before comparing the options, it's crucial to understand what invoice finance actually is. It is not a traditional business loan. Instead of borrowing money against your assets, you are effectively selling your unpaid B2B invoices (your accounts receivable ledger) to a third-party finance company at a discount. In return, they advance you a large percentage of the invoice value upfront, giving you immediate access to cash that would otherwise be tied up for 30, 60, or even 90 days.
How does it work?
The process generally follows these steps:
- You raise an invoice for goods or services delivered to your customer as normal.
- You send a copy of the invoice to the invoice finance provider.
- The provider advances you a percentage of the invoice's value, typically between 80% and 95%, often within 24-48 hours. If you have a £10,000 invoice, you might receive £8,500 immediately.
- Your customer pays the invoice. The process here depends on the type of facility (see below).
- The finance provider pays you the remaining balance, minus their fees. Following the example, once your client pays the full £10,000, the provider would send you the final £1,500, less their charges.
The Main Types: Factoring vs. Discounting
There are two main flavours of invoice finance, and the difference is critical for a small business.
Invoice Factoring: This is the most common type for SMEs. With factoring, the finance company takes over the management of your sales ledger. They will chase the payment directly from your customer. This is a disclosed facility, meaning your customers will be instructed to pay the finance company, not you. They will know you are using a third party to fund your invoices.
Invoice Discounting: This is typically for larger, more established businesses with strong in-house credit control processes. With discounting, you remain in control of chasing your customers for payment. The facility is confidential (or undisclosed), so your customers are unaware you are using invoice finance. They continue to pay you directly, and you then pass the payment on to the finance provider to settle the balance.
For most small businesses, the choice is between factoring and improving their own chasing, as they may not meet the turnover or credit control requirements for discounting.
The Real Costs of Invoice Finance
The headline benefit of invoice finance is immediate cash. The downside is the cost, which is often more complex than a single percentage figure. It's essential to understand the full spectrum of fees before signing any agreement.
The Service Fee (or Discount Fee)
This is the main fee, typically expressed as a percentage of your total turnover, not just the invoices you finance. It can range from 0.5% to 3% or more. A key point often missed is that this fee may be applied to your entire annual turnover that goes through the facility, even if you only choose to finance a portion of your invoices. For a business with £500,000 in turnover, a 2% service fee amounts to £10,000 per year, regardless of how much cash you drew down.
Interest on the Advance (Discount Charge)
On top of the service fee, you pay interest on the money you've been advanced, for as long as it's outstanding. This works much like an overdraft. The rate is usually quoted as a percentage over the Bank of England base rate. For example, if the base rate is 5% and the provider's margin is 3%, you'll be paying an annualised interest rate of 8% on the advanced funds. The longer your customer takes to pay, the more interest you accrue.
Additional Charges
This is where the hidden costs can bite. Always read the small print for fees such as:
- Setup/Arrangement Fees: A one-off charge for setting up the facility.
- Audit Fees: Charges for the provider to periodically audit your books.
- Re-factoring Fees: Extra fees if an invoice goes beyond a certain period (e.g., 90 days) and is still unpaid.
- Credit Check Fees: Charges for the provider to run credit checks on your customers.
- Early Termination Fees: A significant penalty if you want to exit the contract before the agreed term, which is often 12 or 24 months.
The Intangible Costs
Beyond the financial charges, there are non-monetary costs to consider, especially with factoring:
- Loss of Control: The finance company is now managing a key part of your customer relationship. Their chasing style might be more aggressive or less personal than yours, potentially damaging goodwill you've spent years building.
- Reputational Perception: Some customers may view the use of a factoring company as a sign of financial distress, which could affect their confidence in your business.
- Contractual Lock-in: Invoice finance agreements are often long-term and difficult to exit, tying you to a single provider even if your needs change.
What Does "Chasing Harder" Actually Mean?
Many business owners hear "chase harder" and imagine making angry phone calls and sending threatening emails. This is a misconception. Chasing harder isn't about being aggressive; it's about being more systematic, professional, and persistent. It's about building a proper credit control process that prevents payments from becoming seriously late in the first place.
The Time Cost of Manual Chasing
The biggest argument against in-house chasing is the time it consumes. A founder or office manager spending half a day every week manually checking bank statements, cross-referencing aged debtor reports, and typing out individual reminder emails is a significant drain on resources.
If a business owner values their time at, say, £100 per hour, spending five hours a week on credit control costs them £500 per week, or over £25,000 a year in lost opportunity. That's time that could have been spent on sales, strategy, or product development. This is the "cost" that invoice finance promises to eliminate.
The Relationship Cost of Ineffective Chasing
When chasing is done badly—erratically, emotionally, or without a clear process—it can absolutely damage relationships. A panicked, angry phone call to a client who simply forgot to pay can sour a good partnership. Conversely, not chasing at all sends a signal that payment deadlines are not important, encouraging a culture of late payment among your clientele.
A Smarter Approach: Systematic Credit Control
Effective in-house chasing isn't about anger; it's about process. A professional system is predictable for both you and your client.
- Set Clear Terms Upfront: Your contract and invoice should clearly state payment terms (e.g., "Strictly 30 days from date of invoice").
- Invoice Promptly and Accurately: Send invoices the moment a job is complete. Ensure they contain all necessary information: invoice number, date, your bank details, a clear description of the work, and the due date.
- Send Polite Pre-Reminders: A friendly email a few days before the due date is a powerful, non-confrontational tool. It acts as a helpful nudge and catches any issues (like the invoice not being received) early.
- Establish a Clear Escalation Path: When an invoice becomes overdue, your response should be automatic and incremental.
- Day +1: A polite "Just a gentle reminder..." email.
- Day +7: A slightly firmer email, restating the invoice details and asking if there's a problem.
- Day +14: A phone call to their accounts payable department to confirm receipt and ask for a payment date. Follow up with an email summarising the call.
- Day +30: A more formal "Final Notice" email, mentioning your right to charge statutory interest.
- Know and Use Your Legal Rights: For most UK B2B invoices, you are protected by the Late Payment of Commercial Debts (Interest) Act 1998. This gives you the legal right to claim:
- Statutory Interest: This is currently set at 8% plus the Bank of England's base rate. This is a significant charge designed to deter late payment.
- Fixed Sum Compensation: You can also claim a one-off compensation payment for every late invoice. The amount depends on the size of the debt:
| Debt Value (per invoice) | Compensation You Can Claim |
|---|---|
| Up to £999.99 | £40 |
| £1,000 to £9,999.99 | £70 |
| £10,000 or more | £100 |
Simply referencing these rights in your later-stage reminders is often enough to prompt immediate payment. This is your leverage—it's not aggressive, it's business.
This systematic approach is the foundation of good credit control. The challenge for a small business is executing it consistently without it consuming all your time. This is where automation tools become a crucial part of the "chase smarter" strategy. For example, a system like InvoiceReminder can connect to your accounting software (like Xero or QuickBooks) and automatically send out that entire sequence of escalating emails for you, saving hours of manual work each week while ensuring no overdue invoice is ever forgotten.
The Comparison: Invoice Finance vs. In-House Chasing
To make the decision clearer, let's compare the two approaches side-by-side.
| Feature | Invoice Finance (Factoring) | Systematic In-House Chasing |
|---|---|---|
| Speed of Cash | Very fast. Get up to 95% of invoice value in 24-48 hours. | Slower. Cash arrives when the customer pays, but a good process can reduce payment times from 60+ days to <30. |
| Cost | High. Involves a service fee (0.5-3%+ of turnover), interest on advances, plus potential hidden fees. | Low. The main cost is time. This can be drastically reduced with low-cost automation software. |
| Customer Relationship | High risk. You lose control of the communication. The factor's collection methods may be impersonal or aggressive. | Full control. You can tailor the tone and maintain goodwill. A professional process can enhance your reputation. |
| Control | Low. The provider controls the sales ledger and collection process. You are locked into their terms. | High. You are in complete control of your finances, processes, and customer interactions. |
| Admin Burden | Can be high. Requires submitting invoices, reconciling statements from the provider, and managing the facility. | Can be high if done manually. Becomes very low and efficient when automated with software. |
| Scalability | Scales with turnover, but so do the fees. Concentration limits may apply if you have one very large customer. | Highly scalable, especially with automation. A good process works for 10 invoices or 1,000. |
Making the Right Choice for Your Business
There is no single "best" answer. The right choice depends entirely on your business's specific situation, industry, and growth stage.
When Invoice Finance Might Be a Good Fit
- You are a high-growth business: If you are rapidly scaling, winning large contracts that require significant upfront investment in staff or materials, the immediate cash injection from finance can be essential fuel for growth.
- You have long payment terms: If you operate in an industry where 90- or 120-day payment terms are standard (e.g., construction, manufacturing), invoice finance can bridge the huge gap between doing the work and getting paid.
- You have a few large, reliable customers: Factoring works well when your debt is concentrated in a few large, creditworthy companies.
- You lack any admin resources: If you are a product-based business with no in-house admin or finance function, outsourcing the entire collections process might be a pragmatic, if expensive, choice.
When Better In-House Chasing is the Answer
- You are a typical SME or freelancer: For most service-based businesses, consultancies, agencies, and freelancers with a diverse client base, the cost and loss of control associated with factoring is often overkill.
- Your primary problem is disorganisation, not insolvency: If invoices are late simply because you don't have a consistent process for chasing them, the solution is to implement a system, not sell the debt.
- You want to protect customer relationships: If you have recurring clients and value your direct relationship, keeping credit control in-house is paramount. A polite, automated reminder from you is always better than a formal demand from a finance company.
- You have many small invoices: The admin of submitting hundreds of small invoices to a finance provider can be more trouble than it's worth. An automated in-house system handles this effortlessly.
For the vast majority of UK small businesses, the most logical and cost-effective first step is to systematise and automate their own credit control. The cost of doing so is negligible compared to the 1-3% of your entire turnover that a factoring company will charge.
Stop Chasing, Start Automating
The core conflict between invoice finance and in-house chasing is "cash vs. control." While finance offers immediate cash, it comes at a high price in both fees and lost control over customer relationships. For most small businesses, the real problem isn't a fundamental flaw in their business model, but a simple lack of a consistent, professional process for getting paid on time.
Before considering an expensive, long-term factoring agreement, first address the efficiency of your own credit control. Tools like InvoiceReminder are built specifically for this. It connects to your existing accounting software—like Xero, FreeAgent, Sage, or QuickBooks—and automates the entire invoice chasing process. You can set up your own schedule of polite, escalating reminders that are sent on your behalf, turning an unpredictable manual task into a reliable, automated system. This approach allows you to get paid faster and drastically reduce admin time, all while keeping full control of your customer relationships. At no cost right now for unlimited email reminders, it's the most powerful first step you can take to solve your cash flow problems.
InvoiceReminder is built by the team behind WeCovr, a company authorised and regulated by the Financial Conduct Authority which has arranged over one million insurance policies for UK customers.
Frequently asked questions
Is invoice finance a loan?
No, it is not a loan. It is considered a form of asset-based finance where you sell your unpaid invoices (an asset) to a third party in exchange for a cash advance. Because it's not debt, it typically doesn't appear as a loan on your balance sheet.
Can I still charge late payment interest if I use invoice factoring?
In most cases, no. With factoring, you have sold the debt to the finance company. They now own the invoice and the right to collect it. Any collection activities, including the potential application of interest or fees, are handled by them according to their terms.
Will my customers think my business is failing if I use factoring?
This is a common concern. Because factoring is a "disclosed" facility, your customers will know you are using it. While it's a standard business finance product, some customers might perceive it as a sign of cash flow trouble, which could affect their confidence. This is a key reason many businesses prefer confidential invoice discounting if they qualify.
How quickly can I get money from an invoice finance facility?
Once your facility is approved and set up, you can typically receive the cash advance against your invoices very quickly, often within 24 to 48 hours of submitting them to the provider. This speed is the primary benefit of invoice finance.
Is invoice finance regulated in the UK?
The provision of invoice finance itself is not a regulated activity that requires authorisation from the Financial Conduct Authority (FCA), unlike traditional business loans or consumer credit. However, many reputable providers are members of trade bodies like UK Finance and adhere to their code of conduct.
What is the difference between invoice finance and an overdraft?
An overdraft is a form of debt where a bank allows you to borrow up to a certain limit from your current account, charging you interest on the negative balance. Invoice finance is the sale of an asset (your invoices) for a cash advance. Overdrafts are often secured against other business or personal assets, whereas invoice finance is secured against the value of the invoices themselves.