What Is a Prepayment in Invoice Finance?
The prepayment is the amount advanced to you against an invoice, the same as the advance. On an 85% advance rate against a £10,000 invoice, the prepayment is £8,500. The remaining £1,500 is the retention/reserve, released when your customer pays.
Why This Matters
The prepayment (or advance) is the immediate cash you receive when you submit an invoice for factoring or discounting. It's the core reason businesses use invoice finance: turning unpaid invoices into working capital without waiting 30, 60 or 90 days for customer payment.
In practice, if you invoice a customer for £50,000 on net-60 terms and your facility offers an 85% advance rate, you receive £42,500 within 24 hours of submitting that invoice. The remaining £7,500 (the retention or reserve) sits in a trust account and is released to you, minus fees, once your customer settles the invoice.
Understanding prepayment mechanics is essential because it determines your actual cash position: a 90% advance gives you £45,000 immediately versus £42,500 at 85%. That £2,500 difference can be material when you're covering payroll, purchasing stock or funding growth.
Every UK invoice finance facility specifies its advance rate upfront, but the effective prepayment you receive also depends on whether fees are deducted at drawdown or charged separately, and whether concentration limits restrict advances on invoices from a single customer.
Key Points
- Prepayment and advance mean the same thing: the percentage of invoice value paid to you immediately, typically 70% to 90% depending on sector, customer creditworthiness and facility terms.
- On a £100,000 invoice with an 85% advance rate, you receive £85,000 within 24 hours of verification, and the £15,000 retention is held until your customer pays in full.
- Advance rates vary by industry: construction and recruitment often see 80-85%, while manufacturing or retail can achieve 90% if debtor quality is strong and concentrations are low.
- Some lenders (such as Close Brothers and Bibby Financial Services) deduct the first month's service fee from the prepayment, reducing your initial cash; others bill fees separately at month-end.
- Concentration limits cap prepayment on invoices from a single customer (often 25-30% of your total facility), so a £200,000 invoice to one debtor might only attract an advance on £60,000 if you have a £200,000 facility.
- The prepayment is not a loan: you're selling or assigning the invoice, so there's no debt on your balance sheet (under factoring) or it's classified as secured borrowing (under invoice discounting).
- Bad debt protection (if included) affects retention release: if your customer doesn't pay and you have non-recourse cover, the lender absorbs the loss and you keep the prepayment; under recourse, you must repay it.
Real-World Example
A Birmingham logistics company invoices Sainsbury's £80,000 for warehouse services on net-60 terms. They use Aldermore invoice finance with an 85% advance rate and a 1.5% monthly service fee.
Aldermore verifies the invoice and advances £68,000 within 48 hours (85% of £80,000). The £12,000 retention sits in trust. Sainsbury's pays the full £80,000 on day 58. Aldermore releases the £12,000 retention, deducts £1,200 service fee (1.5% of £80,000) and remits the net £10,800 to the logistics company. Total cash received: £68,000 upfront plus £10,800 on settlement.
Common Pitfalls
- Confusing advance rate with net funds: an 85% advance rate sounds high, but if fees are 2% and deducted at drawdown, your day-one cash is only 83% of the invoice value.
- Ignoring concentration limits: a 90% advance rate is irrelevant if 40% of your turnover comes from one customer and the lender caps advances at 25% per debtor, choking your actual prepayment.
- Assuming prepayment equals cash in the bank: if your facility has a minimum reserve requirement (e.g. 10% of all outstanding invoices held back permanently), your effective advance is lower than the headline rate.
- Overlooking the timing of verification: prepayment is only released after the lender checks the invoice is genuine and the debtor exists; disputed or unverified invoices can delay funding by days or weeks.
- Treating prepayment as free money: it's an advance against your own receivables, not additional revenue; you still owe the lender the prepayment if the invoice is cancelled or the customer rejects the goods.
What to Do Next
- Request a worked example from providers (Bibby Financial Services, IGF Invoice Finance, Novuna Business Finance) showing prepayment calculation including all fees, reserve requirements and concentration limits on your typical invoice mix.
- Compare effective advance rates: if Provider A offers 90% but deducts 2% fees upfront (net 88%) and Provider B offers 85% with fees billed monthly (net 85% day one), Provider A delivers more immediate cash.
- Model cash flow impact: calculate how much working capital a given advance rate releases across your debtor book, accounting for payment terms (net-30 versus net-60) and the speed at which you raise invoices.
Related Questions
What is retention (or reserve) in invoice finance?
The retention is the percentage of the invoice value held back by the lender until your customer pays, typically 10% to 30%. On a £20,000 invoice with an 80% advance, the retention is £4,000. Once the customer settles, the lender releases this reserve to you minus fees. Retention protects the lender against disputes, credit notes or partial payments.
Can I negotiate a higher advance rate?
Yes, especially if your debtors are large creditworthy corporates (e.g. FTSE 100), payment terms are short (net-30), and you have low debtor concentration. Providers like Close Brothers and Secure Trust Bank may increase advance rates from 85% to 90% or even 95% for AAA-rated customers. Strong trading history and clean ledger (no disputes) also help.
Do I pay interest on the prepayment?
Under invoice discounting, yes: you pay a discount charge (typically 1-3% over Bank of England base rate) on the prepayment amount from drawdown until the customer pays. Under factoring, you usually pay a service fee (a percentage of invoice value) plus a smaller discount charge. Some facilities (e.g. Sonovate, Kriya) charge a flat fee with no separate interest component.
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: 17 May 2026