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Invoice finance and a term loan are the two tools UK businesses reach for most often when cash is tight, and they get confused because both put money in the account this week. They are built for different problems. This guide sets out how each works, what each costs, and a simple rule for deciding which one fits the gap in front of you.
How a term loan works
A term loan is the familiar shape: the lender advances a fixed sum to the company, and the company repays it — with interest and any fees — over an agreed term. The cost is known at the outset, the schedule is fixed, and once the final payment clears the relationship ends. Terms range from a few weeks (short-term working-capital lenders such as Credicorp) to several years (bank SME loans). The defining feature is that the borrowing is independent of your sales ledger: the lender assesses the company, not any particular invoice.
How invoice finance works
Invoice finance advances money against specific unpaid invoices. You raise an invoice on 60-day terms, the provider typically advances 70% to 90% of its face value within a day or two, and when your customer eventually pays, the provider takes its fees and releases the balance. It comes in two main forms. With factoring, the provider takes over collection and your customers deal with it directly — they will know you are financing. With invoice discounting, you keep collecting and the arrangement is usually confidential. Costs come in two layers: a service fee (commonly a percentage of turnover put through the facility) and a discount charge (interest on the funds advanced, running until the invoice is paid).
The structural difference that matters
A term loan solves one dated gap and then disappears. Invoice finance wraps around your whole ledger — most facilities have minimum terms, monthly minimum fees, and notice periods, and the funding level rises and falls with your invoicing. That makes invoice finance powerful for a business whose problem is permanent (customers always pay in 60 days, and growth keeps swallowing the float) and expensive overkill for a business whose problem is occasional (one big invoice is late, once).
A side-by-side worked example
Illustrative example. A two-person joinery firm has a £480 timber bill due Friday and a reliable customer payment arriving in five weeks. Route one: a short-term loan of £480 over 35 days at 0.25% per day costs £42 in interest plus a £5 establishment fee — £47 all in, then it is over. Representative example: borrow £200 for 30 days, repay £220. Route two: an invoice-finance facility could advance around 85% of an outstanding £2,000 invoice — £1,700 — but a typical small facility carries a monthly minimum fee, a service fee on every invoice put through it, and a contractual minimum term, so the effective cost of solving this one five-week gap would be far more than £47, and the firm would still be in the facility next year. For a one-off gap, the loan wins on simplicity and total cost. If that same firm invoiced £30,000 a month on 60-day terms and was constantly short, the arithmetic reverses: invoice finance would release cash continuously in a way no fixed loan can.
Where each one goes wrong
The classic term-loan mistake is borrowing against hope rather than a date — taking a loan with no identified repayment source, then rolling it. The classic invoice-finance mistakes are three: signing a whole-ledger agreement when only one or two customers pay slowly (some providers offer selective, single-invoice finance — ask); underestimating how fees stack once the service fee, discount charge, and minimums are added up over a year; and, with factoring, not considering how a finance company chasing your customers affects those relationships. With either product, read the termination clauses before signing, not after.
A plain rule for choosing
Ask one question: is the gap a date or a pattern? If cash is short until a known payment lands — a specific invoice, a seasonal spike, a tax refund — that is a date, and a fixed-cost, fixed-term loan matches it exactly. If cash is short every month because your payment terms are structurally longer than your cost cycle, that is a pattern, and invoice finance (or renegotiated terms with customers — often the cheapest fix of all) addresses the structure. Credicorp serves the first case: loans of £50 to £500 over 14 to 84 days to UK limited companies and LLPs, priced flat with no personal guarantee. Run your own numbers on the calculator, or apply online if the gap in front of you has a date on it.
Frequently asked questions
- Is invoice finance cheaper than a business loan?
- Not inherently — the cost structures are different shapes. A term loan has a fixed, known total cost. Invoice finance layers a service fee on turnover with a discount charge on funds advanced, plus common minimum monthly fees. For a single short gap a small fixed-cost loan is usually cheaper; for a continuous working-capital shortfall driven by long payment terms, invoice finance can be better value because funding scales with sales.
- What is the difference between factoring and invoice discounting?
- With factoring, the finance provider takes over credit control and collects payment from your customers directly, so customers know a finance company is involved. With invoice discounting, you keep collecting your own invoices and the facility is usually confidential. Because discounting requires stronger internal credit control, it tends to be larger businesses that use it, with factoring more common at the smaller end.
- Do I need to offer my whole sales ledger for invoice finance?
- Traditionally yes — whole-ledger agreements are the standard product, with minimum terms and notice periods. A growing number of providers offer selective or single-invoice finance, where you fund only chosen invoices and pay per transaction. Selective finance costs more per invoice but avoids being locked into a facility your business only occasionally needs.
- Can I have invoice finance and a business loan at the same time?
- Often, yes, but disclosure matters. An invoice-finance provider usually takes security over your receivables, and other lenders will factor existing facilities into affordability. Tell each lender about the other. Credicorp's short-term loans are assessed on the company's overall trading position, and an honest picture of existing commitments is part of that assessment.