When to Refinance an Invoice Finance Facility: A 2026 Guide for UK SMEs
Refinancing an invoice finance facility means moving to a new provider or renegotiating terms with your existing one, usually to cut costs or improve service. With the Bank of England base rate at 3.75%, many SMEs on older facilities are paying more than current market rates. This guide sets out when a switch is worth the disruption.
What Refinancing an Invoice Finance Facility Actually Involves
Refinancing means replacing your current factoring or invoice discounting agreement with a new facility, either from a different provider or on renegotiated terms with your existing lender, usually to secure a lower discount charge or a better service fee.
For most SMEs this is not a routine event. It involves closing the existing sales ledger with the outgoing provider, agreeing a deed of priority if any invoices remain outstanding, and onboarding with a new lender's credit control and reporting systems. Providers competing for new business will often quote sharper margins over base rate, particularly for businesses with a clean payment history and a diversified debtor book.
The disruption is real, so it only makes sense when the savings or service improvement clearly outweigh the switching cost and admin.
Signs Your Current Facility Is No Longer Competitive
A facility that was competitive when the base rate was higher can become expensive once rates fall, because many providers are slow to pass reductions through to existing clients even as they offer sharper terms to new customers.
Warning signs include a discount margin that has not moved despite recent Bank of England rate cuts, service fees that have crept up at each annual review, minimum service charges that penalise seasonal dips in turnover, and account managers who are hard to reach. Businesses should compare their all-in cost, margin plus base rate plus service fee, against current market quotes at least once a year. If the gap is more than half a percentage point on the margin alone, it is usually worth requesting a formal quote from at least two alternative providers before deciding whether to stay.
The Base Rate and What It Means for Your Discount Charge
The Bank of England base rate stands at 3.75% following its move on 18 December 2025, and because most invoice finance facilities price the discount charge as base rate plus a fixed margin, every rate change flows directly into borrowing costs.
A facility agreed when the base rate was higher will have baked in a margin that reflected that environment. As the base rate has fallen, the total cost should have fallen too, but the margin itself is separately negotiable and does not move automatically. SMEs on variable facilities should check their most recent statement to confirm the base rate applied matches the current Bank of England rate, not a stale figure from months earlier. Any lag should be queried directly with the provider.
Contract Terms That Can Block or Complicate a Switch
Most invoice finance agreements run for an initial minimum term, commonly twelve months, with an automatic renewal clause and a notice period of one to three months, so checking the contract before approaching a new provider avoids an unexpected early termination charge.
Key clauses to review include the minimum service charge, which continues even if turnover drops, exit fees for leaving before the renewal date, and any requirement to give notice in writing by a specific date each year. Missing the notice window can lock a business into another full term. Businesses close to their renewal date have the strongest negotiating position and should start comparing alternatives two to three months ahead of the deadline, not after it has passed.
Deed of Priority: Switching While Invoices Are Still Outstanding
A deed of priority is a legal agreement between the outgoing and incoming finance provider that sets out which lender has first claim over invoices raised before the switch, and it is required whenever a business moves provider with debtor book still outstanding.
Without one, both lenders could claim security over the same invoices, which neither will accept. Arranging the deed typically adds two to four weeks to the switching timeline and involves both providers' legal teams. Businesses should ask a prospective new provider early in the process whether they routinely handle deeds of priority and how long theirs usually take, since delays here are the most common reason a planned switch overruns its target date.
Weighing the Cost of Switching Against the Savings
Switching invoice finance provider carries direct costs, including any exit fee, legal costs for the deed of priority, and the internal time spent re-onboarding credit control, so these should be set against the annual saving before a decision is made.
A business turning over 2 million pounds through its sales ledger might save 0.5 percentage points on the margin, worth around 10,000 pounds a year, against one-off switching costs of perhaps 2,000 to 4,000 pounds. On those numbers the payback period is well under six months, which makes the case straightforward. Smaller facilities with thinner margins should run the same sum before committing, since the arithmetic does not always favour a switch.
How to Compare Quotes Properly Before Refinancing
Comparing invoice finance quotes on the headline discount rate alone misses most of the real cost difference, so businesses should request a full breakdown covering margin over base rate, service fee, minimum service charge, and any set-up or exit costs.
It is also worth asking each provider how they calculate the prepayment percentage against approved invoices, whether credit control is handled in-house or outsourced, and what the process looks like if a major debtor is slow to pay. A lower headline rate paired with a lower prepayment percentage can leave a business with less usable cash than a slightly higher rate with a stronger advance. Getting quotes in writing on the same basis makes the comparison fair.
| Facility type | Typical margin over base rate | Total discount charge (3.75% base rate + margin) | Typical service fee | Typical prepayment % |
|---|---|---|---|---|
| Confidential invoice discounting | 1.5% to 3.0% | 5.25% to 6.75% | 0.2% to 0.5% of turnover | 80% to 90% |
| Full factoring | 2.0% to 4.0% | 5.75% to 7.75% | 0.75% to 2.5% of turnover | 80% to 90% |
| Selective or spot factoring | 3.0% to 5.0% | 6.75% to 8.75% | Per-invoice fee, no annual minimum | 70% to 85% |
Step by step
- Check your contract for the renewal date and required notice period.
- Request a full cost breakdown from your current provider, including margin, service fee and minimum service charge.
- Obtain comparable written quotes from at least two alternative providers.
- Calculate the annual saving against the likely switching costs, including any deed of priority fees.
- Give formal written notice within the contractual window if proceeding.
- Instruct both providers' legal teams to agree the deed of priority for outstanding invoices.
- Onboard credit control and reporting with the new provider before the handover date.
Example
A Midlands-based wholesale distributor had been on the same invoice discounting facility for four years. Despite recent Bank of England rate cuts, its margin over base rate had not moved and the minimum service charge had risen at each renewal. After requesting quotes from two alternative providers, the business found a facility with a 0.6 percentage point lower margin.
Switching costs, including the deed of priority, came to just under 3,000 pounds, against an estimated annual saving of 11,000 pounds. The switch completed within six weeks of giving notice.
FAQs
How often should I review my invoice finance facility?
Most brokers and advisers suggest reviewing pricing at least once a year, ideally two to three months before your contract's renewal date. This gives enough time to gather comparative quotes and negotiate with your current provider, or give notice if you decide to switch, without missing the notice window.
Will switching provider affect my customers?
There will usually be a short handover period where invoices are assigned to the new provider and customers are notified of the new payment details. A well-managed switch, with the deed of priority agreed in advance, should not disrupt payment collection, though it is sensible to notify key debtors directly to avoid confusion.
Can I refinance before my contract's renewal date?
It is possible but usually more expensive, since most agreements charge an early termination fee if you leave before the minimum term or renewal date ends. Some providers will negotiate a reduced exit fee if you are moving to another facility with the same group or a related lender, so it is worth asking.
Does a lower base rate automatically reduce my invoice finance costs?
Only if your facility is on a variable rate linked to the Bank of England base rate and your provider applies the reduction promptly. Check your latest statement to confirm the base rate charged matches the current 3.75% rate, since some providers are slower than others to pass changes through.
What is a deed of priority and who arranges it?
A deed of priority is a legal document that sets out which lender has first claim over invoices raised before a switch of provider. It is usually arranged jointly by the outgoing and incoming provider's legal teams once you have given notice, and typically adds two to four weeks to the switching process.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam is the founder and managing director of Muswell Rose and a founder of Best Business Loans Ltd, the company behind Market Invoice. He spent over three years as managing director of Penny, a UK invoice finance business, and his career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library.
Last reviewed: 9 August 2026