If you run a manufacturing business, chances are you've experienced cash flow problems. In order to keep projects moving and business ticking over, you've probably looked at temporary funding solutions to plug these gaps, such as bank loans or invoice finance.
In manufacturing, cash often leaves the business long before new revenue arrives. You take on a huge contract, pay upfront for materials, labour, and expensive machinery, and then wait 60-90 days for the client to pay your invoice — and that's if they pay on time.
What's the Difference Between Invoice Finance vs Bank Loans for Manufacturers?
Bank loans usually provide a fixed lump sum based on your company's overall credit history, which you'll then repay through monthly instalments plus interest over a set term. Your borrowing limit is usually capped by your credit score, assets, and financial history. Bank loans typically have a slow application process and take weeks or months for approval.
Invoice finance is different because it provides continuous, flexible funding based on the value of your unpaid customer invoices, which is automatically repaid once your customer settles their bill. With this option, your credit score doesn't matter — the outstanding invoices act as security. Invoice finance is typically released within 24-48 hours and advances 80-90% of the bill amount upfront.
Bank Loans vs Invoice Finance Compared
| Key info | Invoice finance | Bank loans |
|---|---|---|
| How fast? | 24-48 hours after setup | 6-8 weeks after application |
| How is eligibility tested? | Your customers' creditworthiness | Your business credit, track record, collateral |
| How much can you borrow? | Amount grows as your sales grow | Fixed amount agreed upfront |
| What's the cost? | 0.5-5% fee per invoice | 6-15% per year |
| Does it show up on your balance sheet? | Usually no | Yes, as a liability |
| How do you pay it back? | Automatic when your customer pays | Fixed monthly repayments |
| What if your sales double? | Available funding increases too | New application needed for more cash |
| When should you use it? | Filling month-to-month cash gaps | Funding major investments, new facilities, equipment |
| Will your customers know? | Depends on type (factoring vs discounting) | No |
Cash Flow Problems in Manufacturing
The British Business Bank has identified slow customer payments as one of the biggest working capital headaches for growing companies. But for manufacturing firms, this problem is multiplied compared to retail or service businesses.
You could be a contract manufacturer with a £2m annual turnover, but if your average customer demands 90-day payment terms, that means you're spending around £300,000 on materials, staff, and overheads every month and waiting 90 days to be paid. On a spreadsheet, your business may look profitable, but in reality, you're constantly plugging gaps.
So where do you turn? A bank loan might spot you £100,000 to cover your costs, but you may not see that money for six to eight weeks. Invoice finance, on the other hand, could advance you the cash in as little as 24 hours.
Of course, a bank loan might be the best solution for a different problem. If you need to buy new machinery or make a strategic acquisition, you may decide to borrow a larger amount of money over a longer term. Invoice finance won't work in this scenario because it's tied to your invoiced sales rather than new assets you're purchasing.
Why Invoice Finance Works for Manufacturers
Around 55,000 UK firms use invoice finance or asset-based lending facilities. Many businesses believe that using invoice finance is a last resort before bankruptcy, or that it signals financial distress. These assumptions are mostly wrong. Invoice finance is a legitimate way to pull funds against your unpaid customer invoices when needed.
It's also completely possible to use invoice finance without your customers knowing. Invoice factoring usually means you hand over your sales ledger to a third party and they handle the repayments, but invoice discounting can be completely confidential.
Selective invoice finance is a flexible way to secure funding against individual invoices instead of handing over your entire sales ledger.
Bank Loans vs Invoice Finance: Key Considerations
Bank Loans
Bank loans can be a bit of a headache. The approval process is usually complicated and slow, and you'll need to provide detailed records of your business finances, personal guarantees, and security agreements. A bank loan will also show up on your balance sheet as a liability, affecting your debt-to-equity ratio.
Invoice Finance
Even though most manufacturers need invoice finance at one time or another, it still has its potential drawbacks. The fees pile up surprisingly fast — if you're financing £100,000 in invoices at 2% each month, you're paying £24,000 in fees per year. This often ends up lower than the cost of not doing it, when you consider overdraft interest, late payment penalties, and missing out on early payment discounts.
You should also think about recourse risk. With most invoice finance facilities, if a customer doesn't pay their invoice, you're liable for the full amount. Some facilities offer bad debt protection, but this comes at a higher cost.
Questions You Should Ask When Deciding
Do you need cash quickly, in the next week or two? If yes, invoice finance is the answer. Bank loans typically take 6-8 weeks, while invoice finance can be turned around in 24-48 hours.
Do you need to fund new equipment or to expand your facility? A bank loan is the only real option here.
Do your customers take longer than 30 days to pay? If yes, invoice finance can cover 80-90% of the invoice's total value.
Do you experience seasonal ups and downs? Invoice finance is more flexible, as your funding can grow with your sales. Bank loans are fixed, so there's less flexibility for down periods.
Which Funding Method is Right for You?
Invoice finance and bank loans solve very different problems for manufacturing businesses. Paying out of pocket for big projects or payroll while you wait 30-90 days for customers to pay? Invoice finance is a great solution. Need funding for a new piece of machinery or to fund business expansion? This is when to consider a bank loan.
Many UK manufacturing firms end up using both to solve different problems.