Invoice Finance vs Revolving Credit Facility: How to Choose

Invoice finance and revolving credit facilities both provide flexible working capital, but they work in very different ways. Invoice finance releases cash tied up in unpaid invoices, scaling with your sales ledger. A revolving credit facility gives you a fixed borrowing limit to draw and repay as needed. The right choice depends on your debtor profile, growth rate, and how predictable your cash needs are.

What Is a Revolving Credit Facility?

A revolving credit facility (RCF) is a pre-agreed borrowing limit that a business can draw down, repay, and redraw repeatedly during the facility term. It works in a similar way to a business overdraft, but RCFs typically carry lower rates and longer committed terms, often 12 to 36 months.

Interest is charged only on the drawn balance, not the full limit. Most RCFs are provided by banks or specialist lenders and are secured by a fixed and floating charge over the business, often backed by a personal guarantee from directors.

RCFs suit businesses that need a reliable liquidity buffer: covering payroll during a slow month, bridging a VAT payment, or funding stock ahead of a large contract. The limit stays constant regardless of how much you invoice, so a fast-growing business can quickly find the facility too small for its needs.

How Invoice Finance Works as a Working Capital Tool

Invoice finance converts your accounts receivable into immediate cash. When you raise an invoice, the lender advances a percentage of its face value, typically between 70 and 90 per cent, within 24 to 48 hours. The remaining balance, less fees, is paid once your customer settles.

Because the facility is tied directly to your sales ledger, it grows organically as your turnover increases. A business billing £500,000 a month can access more working capital than one billing £100,000, without needing to renegotiate limits.

There are two main forms: invoice factoring, where the lender manages your credit control and collects from customers directly; and invoice discounting, where you retain control of collections and the arrangement is typically confidential. Lenders regulated by the FCA must disclose the terms of the facility clearly, and UK Finance publishes industry data showing invoice finance supports around £23 billion of UK SME funding annually.

Cost Comparison: What You Actually Pay

Understanding the true cost of each product requires looking beyond headline rates. With a revolving credit facility, you pay a margin over the Bank of England base rate (currently 3.75 per cent as of 18 December 2025), plus an arrangement fee and sometimes a non-utilisation fee on undrawn amounts. A typical SME RCF might be priced at base rate plus 3 to 5 per cent, giving an all-in rate of roughly 7.5 to 9.5 per cent per annum on drawn balances.

Invoice finance pricing has two components: a service charge (typically 0.5 to 2.5 per cent of turnover) covering ledger management and administration, and a discount charge applied to the funds advanced, usually expressed as a margin over base rate. When combined and expressed as an APR against the average daily balance drawn, invoice finance can appear more expensive in isolation, but because it replaces the need for other borrowing and accelerates cash collection, the net cost to the business is often lower.

Always ask any lender for a full illustrative cost schedule before signing heads of terms.

Security, Personal Guarantees, and Debentures

Both products typically require a debenture, which is a legal charge over all present and future assets of the business registered at Companies House. This gives the lender priority over other unsecured creditors in an insolvency scenario.

A revolving credit facility from a high street bank will almost always require a personal guarantee (PG) from directors, particularly for SMEs with limited assets. The PG makes directors personally liable for the outstanding balance if the business cannot repay.

Invoice finance lenders also frequently require PGs, though some specialist providers will reduce or waive them where the quality of the debtor book is strong. Because invoice finance is self-liquidating, meaning invoices are repaid by your customers rather than from your own cash flow, lenders sometimes view it as lower risk than an unsecured RCF and may require a smaller PG as a result.

Before signing either facility, have a solicitor review the debenture and PG wording carefully.

Which Businesses Are Better Suited to Each Product?

Invoice finance tends to suit B2B businesses with multiple customers, invoice payment terms of 30 to 90 days, and turnover above roughly £100,000 per year. It is particularly effective for staffing agencies, logistics companies, construction subcontractors, and professional services firms where cash is locked up in long debtor cycles.

A revolving credit facility is a better fit for businesses with irregular capital needs that do not arise directly from invoicing: seasonal stock purchases, bridging a tax payment, or funding a marketing campaign. It also suits businesses with a mix of B2B and B2C income where the invoice ledger is not large enough to support a meaningful facility.

Some businesses use both: an invoice finance facility to manage the debtor book day to day, and a small RCF to cover one-off expenses or smooth out timing mismatches. Lenders will want to understand the total debt structure, so be transparent about any existing facilities when applying for either product.

Switching Between Products: Practical Considerations

If you currently have a revolving credit facility and are considering moving to invoice finance, check your existing loan agreement for a negative pledge clause. This clause prevents you from granting security to another lender without consent. An invoice finance provider will take a charge over your receivables, which may conflict with your RCF lender's debenture.

You will need a Deed of Priority between the two lenders if you plan to hold both simultaneously. This document sets out which lender has first claim over specific assets. Arranging one adds legal cost and time, typically two to six weeks, so factor this into your planning.

If you are replacing an RCF entirely with invoice finance, ensure the drawdown from the new facility is timed to repay the RCF on or before the termination date to avoid double interest charges. Notify your bank in writing and request a formal confirmation of discharge once the charge is released and updated at Companies House.

Questions to Ask Before You Decide

Before committing to either product, work through these practical questions with your finance director or accountant.

First, how predictable are your cash needs? If your working capital requirement moves directly in line with invoicing, invoice finance is likely the more natural fit. If you need a buffer that is independent of sales, an RCF may be more appropriate.

Second, how important is confidentiality? Invoice discounting can be run confidentially so customers never know a lender is involved. An RCF has no customer-facing element at all. Factoring, by contrast, involves the lender contacting your customers directly, which some businesses prefer to avoid.

Third, what is your debtor concentration? If more than 25 per cent of your ledger sits with one customer, most invoice finance providers will apply a concentration limit, which reduces the available funding. An RCF is not affected by debtor concentration in the same way.

Finally, ask each lender for a written breakdown of all fees, charges, and exit costs before you agree heads of terms.

Checklist

• ☐Request a full illustrative cost schedule from any lender, showing all fees expressed as an APR against average drawn balance.
• ☐Check your existing loan or overdraft agreement for negative pledge clauses before applying for invoice finance.
• ☐Ask whether a personal guarantee is required and, if so, what the cap and duration are.
• ☐Confirm whether the invoice finance facility will be disclosed or undisclosed to your customers before signing.
• ☐If holding both an RCF and invoice finance simultaneously, arrange a Deed of Priority between both lenders.
• ☐Get written confirmation of any exit costs, minimum notice periods, and what happens to prepaid service charges if you terminate early.

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