Invoice Factoring

What is invoice factoring?

Invoice factoring is a funding facility where a business sells its unpaid invoices to a funder, who advances most of their value straight away, typically 70 to 90 per cent, and then collects payment directly from the business's customers. When a customer pays, the business receives the remaining balance minus fees. Factoring combines funding with credit control in a single facility. See our glossary of invoice finance terms for the language funders use.

How invoice factoring works, step by step

It's pretty straightforward. You deliver your goods or complete your work and raise an invoice to your business customer just like normal, sending a copy over to the factor. Usually within 24 hours, the factor advances the agreed percentage of the invoice value straight into your account. From that point on, the factor's credit control team takes over the heavy lifting of collecting the payment. They send the statements, make the chasing calls, and manage the sales ledger on your behalf. When your customer finally pays, they pay the factor directly, and you receive the remainder of the invoice value minus the factor's charges. You just repeat this with every invoice you raise, meaning your funding naturally rises and falls in line with your sales.

The part people underestimate: the credit control

A lot of businesses come to factoring for the quick cash, but end up valuing the collections service just as much. Let's face it, chasing invoices is a job nobody really enjoys—it eats up hours every week, and it puts business owners in the awkward position of having to hassle the very same customers they're trying to keep happy. A factor's credit control team handles it professionally and persistently, and we often find that customers actually pay faster when a funder is the one doing the asking. For a small business, factoring can effectively replace the need to hire a dedicated credit controller, which completely changes the cost calculation. When you're weighing up the service fee, it's worth remembering to factor in the salary you aren't having to pay.

Who factoring suits best

Factoring tends to be the perfect answer for smaller and growing businesses—typically those that don't have a dedicated credit control function—and for any business whose time is much better spent winning new work rather than chasing old payments. It's also generally the more accessible product. Because the factor controls the collections, they're carrying less risk than they would with invoice discounting. This means factoring is often available to newer businesses, smaller turnovers, and those with imperfect credit histories that discounting providers might normally decline. On the other hand, if your business is larger, runs its own credit control smoothly, and you'd prefer your customers didn't know a funder was involved, discounting or confidential invoice finance will likely be a better fit (and we'll always tell you if that's the case).

One thing to be aware of: factoring is disclosed

With a standard factoring facility, your customers will know you're using it. Invoices will carry a notice directing payment to the factor, and the factor's team will be the ones contacting your customers to collect. For the vast majority of businesses, this is a complete non-issue. Invoice finance is so widespread in the UK now that suppliers using it barely raise an eyebrow, and having professional collections can even signal that a business is run properly. But if confidentiality genuinely matters in your specific market, just let us know at the start. Confidential variants do exist, including facilities where you can keep the collections in-house, and pointing you toward the right structure is a big part of the matching we do.

Recourse and non-recourse: what happens if a customer never pays?

Most factoring in the UK is provided "with recourse," meaning that if your customer fails to pay after an agreed period, the invoice is passed back to you and the advance is recovered. "Non-recourse" factoring adds bad debt protection into the mix—so if a customer becomes insolvent, the loss falls on the funder rather than your business, in exchange for a slightly higher fee. Whether that protection is actually worth paying for depends heavily on who your customers are and how concentrated your ledger is. It's one of the key questions we'll talk through before recommending any specific provider. For a deeper look at every scenario, read our guide to what happens if your customer doesn't pay.

What does factoring cost?

Factoring is normally priced in two distinct parts. First, there's a service fee, charged as a percentage of your funded turnover, which covers running the facility and the credit control service itself. Then there's a discount charge, which acts a bit like interest, applied to the funds you actually draw down. Rates can vary significantly depending on your turnover, your sector, and the quality of your customers. The differences between providers quoting for the exact same business can be substantial. Our invoice finance costs and rates guide breaks down every charge you might encounter, including minimum fees and notice periods—which is usually where the poor deals like to hide.

Why arrange factoring through a broker?

Simply because factoring providers range from massive high street banks to niche specialist independents, and their appetites barely overlap. Some want £2 million turnover minimums, while others specialise entirely in new starts. Some love construction; others won't touch it with a barge pole. If you approach the wrong ones, you can easily burn weeks just collecting rejections. We already know the appetite of every provider on our panel, so we take your details once and introduce you straight to the one or two that are genuinely suited to your business. Best of all, our service is free for you to use. The provider pays our commission, and we'll always be upfront about that arrangement.