Funding Business Growth Without a Bank Loan
When a business grows, more of its cash sits in unpaid invoices. As an example, a company growing from £500k to £1m turnover adds about £41,700 a month of new invoicing (£500k ÷ 12). If customers take one to two months to pay, that ties up about £42,000 to £83,000 more in unpaid invoices. Invoice finance lends against those invoices, so the amount you can draw rises as your invoicing rises, up to your facility limit. Asset-based lending works in a similar way. It costs a service charge plus a discount charge, and it only funds invoices you have already raised.
Invoice finance can fund growth without a bank loan because the amount you can draw rises with your invoices, up to your facility limit. It only funds invoices you have already raised, and it has a cost. More detail + scope
This page covers
How invoice finance funds business growth compared to bank loans and overdrafts
Not covered here
Specific provider recommendations (see /best/invoice-finance-for-small-business/), startup eligibility (see /industries/startups/)
The Growth Cash Trap
An example: you invoice £50,000 a month and customers pay in 45 days, so about £75,000 is tied up in unpaid invoices at any time (1.5 months of billing). You grow to £80,000 a month, and now about £120,000 is tied up. You haven't spent more; you've done more work that hasn't been paid for yet.
That extra £45,000 has to come from somewhere. A term loan gives you a fixed amount, and an overdraft has a set limit, so you may need to go back to the bank as you grow. With invoice finance, what you can draw follows your invoices, up to the limit the lender agrees.
Invoice Finance and a Business Loan Compared
| Invoice Finance | Business Loan | |
|---|---|---|
| Scales with growth? | Yes, with your invoices, up to the facility limit | No, a fixed amount |
| Need to reapply as you grow? | Not to draw more within your limit; a higher limit needs the lender's agreement | Usually, for more money |
| How it shows in your accounts | Depends on the facility; ask your accountant | A loan |
| Security | Your invoices, often with a debenture and sometimes a personal guarantee | Varies by lender and loan |
| Young businesses? | Some lenders publish no minimum turnover or trading history; you need business customers and invoices | Lenders often ask for accounts |
Growth Situations Where Invoice Finance Can Help
Winning a major contract
You win a large new contract, and the first invoice won't be paid for weeks. Once you raise that first invoice, invoice finance can advance against it. It cannot fund the costs before you invoice.
Opening a second location
Invoice finance can release cash from the invoices you already have, which can free up other money for the move. It does not lend against the new site itself; for that, look at a loan or asset finance.
Hiring ahead of demand
Invoice finance does not fund work you have not yet invoiced. It can release cash tied up in invoices from your existing work, which can help cover new salaries while the new work builds up.
Taking on bigger projects
You win a project several times bigger than usual. If you bill it in stages, you can draw against each stage invoice as you raise it. Ask the lender whether it funds stage or milestone invoices before you rely on it.
What it costs and what it asks of you
You usually pay a service charge plus a discount charge on the money you draw, set as a margin over the Bank of England base rate. The lender advances part of each invoice, not all of it. Most lenders take security over your invoices, often with a debenture, and some ask for a personal guarantee. There is usually a minimum contract term and a notice period. Most lenders don't publish their charges, so get written quotes; our invoice finance costs guide explains each charge.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam was managing director of Penny, a UK invoice finance business, from July 2020 to November 2023. His career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library. Career record.
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