Invoice factoring lets you sell your unpaid B2B invoices to a finance company (the factor) and get most of the cash within a day or two, instead of waiting 30 to 120 days for your customers to pay. You hand over the invoice; the factor advances 80 to 90% of its value, chases the customer for payment, and pays you the rest, minus its fee, once the money lands.
This guide covers what factoring is, how it works in practice, what it costs, how it differs from invoice discounting, and who it genuinely suits. We arrange invoice finance for UK businesses, so the verdicts below are written from what we see borrowers actually sign, not from a brochure.
What Is Invoice Factoring?
Invoice factoring is a form of invoice finance where you sell your outstanding invoices to a factor at a small discount and get paid upfront. It turns money you are owed into money you can use now. The factor advances 80 to 90% of the invoice value, then collects payment directly from your customer and releases the rest, less its fee.
The part that catches owners out is who does the chasing. With factoring, the factor takes over credit control and contacts your customers for payment. We’d call that the defining feature, and the main thing to weigh before you sign. That’s the trade-off: cash now, collections gone. If your finance function is one part-time bookkeeper, handing collections over is often the real attraction, not a downside.
How Invoice Factoring Works
The mechanics are the same across the market:
- You deliver goods or services and raise an invoice on credit terms.
- You assign that invoice to the factor.
- The factor runs a quick check on your customer’s creditworthiness, then advances an agreed percentage, typically around 80%.
- The factor collects payment from your customer when the invoice falls due.
- Once your customer pays in full, the factor releases the remaining balance to you, minus its fee.
We’d flag what the factor underwrites: your customer’s ability to pay, not yours. That is why factoring can work for a young business with a thin credit file but blue-chip customers, and why it gets harder if your ledger leans on one shaky payer.
A worked example
Say you run a business with a cash-flow gap and you raise a £20,000 invoice on 60-day terms. You factor it at an 80% advance rate, so the factor pays you £16,000 straight away. It also takes over collections, so you are not the one chasing the customer for two months.
When your customer settles the full £20,000, the factor releases the remaining £4,000, less its fee. If the fee on this invoice is £800, you receive £3,200. Across the deal you have collected £19,200 of the £20,000 invoice, and the £800 is what the speed and the credit control cost you. Whether that is worth it depends on what the £16,000, eight weeks early, lets you do.
What Invoice Factoring Costs
Factoring pricing is built from two charges, and the headline number is only ever half of it:
- Discount charge, the cost of the money advanced, usually 1.5% to 5% depending on your customers’ credit quality, the sector, and how complex the ledger is. It works like interest on the cash you have drawn.
- Service fee, the admin and collections charge, typically 1% to 2% of invoiced turnover. In factoring this also pays for the credit control the factor runs on your behalf.
We’d watch the extras that do not show up in the headline rate: arrangement fees, an annual audit or due-diligence fee, minimum monthly usage fees, and notice-period or termination charges if you leave. Ask for every chargeable item in writing before you commit. If a provider will not put the full fee stack on paper up front, that’s your warning, not a detail for later.
Factoring vs Invoice Discounting
Factoring and invoice discounting both advance cash against your ledger. The difference comes down to one question: who chases your customers.
With factoring, the factor runs collections and your customers pay the factor directly, so the arrangement is usually disclosed on the invoice. With invoice discounting, you keep credit control in-house and your customers never know a third party is involved; it is normally a confidential facility. Discounting suits established businesses with a proper credit control function; factoring suits those who would rather hand the chasing over, or simply do not have the headcount to do it well. We’d point you to factoring when collections are the real burden, discounting when confidentiality matters more.
There is a middle ground worth knowing about. Some factors will stay in the background, set up a collections account in your business name, and present themselves as your billing department if they do contact a customer. If protecting client relationships is the worry, raise it on the first call; how visible the factor is can usually be negotiated.
Recourse vs Non-Recourse Factoring
Recourse factoring is the standard, cheaper version. If your customer never pays, the debt comes back to you and you repay the advance. The factor funds the invoice but does not carry the risk of a bad debt.
Non-recourse factoring, often sold as “bad debt protection”, shifts the risk of customer insolvency to the factor. It costs more, because the factor is now on the hook if your customer goes under. In our view, whether it is worth the premium depends on your own bad-debt history and how concentrated your ledger is. Concentrated ledger? That’s when non-recourse earns its fee. If one large customer failing would sink you, the cover is usually cheaper than the loss. If your debts spread across many reliable payers, recourse is normally the better value.
Who Invoice Factoring Is For
Factoring works for businesses that invoice other businesses on credit terms and wait too long to get paid. We rate it as just as usable for a startup as for a large company, because the factor weighs your customers’ credit more heavily than your own. When your accountant is buried in chasing late payers, handing collections to the factor buys back the time. A new agency with strong clients can often factor where a bank would decline a loan outright.
When a recruitment agency funds Friday payroll against invoices that will not settle for 60 days, factoring is the gap-filler that keeps wages paid. The same logic applies to manufacturers paying suppliers ahead of stage payments, and hauliers carrying fuel costs against 45-day ledgers. In assessing you, a factor will look at the size and source of your invoices, the payment terms, the risk in your customer base, and your own track record, in roughly that order of importance.
It does not work if you sell to consumers or get paid at the till; there is no credit-term invoice to fund. It also gets expensive and tightly capped if one customer dominates your ledger, unless you add cover such as non-recourse protection.
Pros and Cons of Invoice Factoring
Pros
- Releases cash tied up in unpaid invoices, usually within 24 hours of upload.
- Hands credit control to the factor, so you spend less time chasing late payers.
- Scales with your sales ledger rather than a fixed loan ceiling, so funding grows as you do.
- Cheaper than giving away equity, and accessible when a bank loan is not.
- The factor’s professional chasing can shorten how long your customers take to pay.
Cons
- Disclosed factoring tells your customers a third party is collecting, which some relationships feel.
- It costs more than a bank loan, so it suits margins that can absorb the fee.
- It can reduce your scope for other borrowing against the same ledger.
- You give up a degree of control over how your customers are chased.
Selective and Reverse Factoring
You do not always have to factor the whole ledger. Selective or spot factoring lets you fund individual invoices you pick, which is useful when the cash pressure is concentrated around one big customer or a single project rather than running across the whole book. It costs more per invoice but commits you to nothing ongoing.
Reverse factoring, or supply-chain finance, runs the other way round: a large company introduces its smaller suppliers to its own finance provider, so the supplier’s invoices are funded against the buyer’s stronger credit. It is a small slice of the market, but for a supplier to a major customer it can unlock cheaper funding than they could get alone.
How to Get Invoice Factoring
There are plenty of factoring companies in the UK, and terms vary widely on price, advance rate and contract length, so we’d compare more than one. Don’t sign on the headline rate alone. The quickest way to see whole-of-market options is through a comparison service such as Funding Options by Tide, which matches your ledger against a panel of providers without you approaching each one separately. Our best invoice finance companies guide sets out who suits which kind of business.
Before you sign anything, get the full fee schedule, the minimum term, the notice period and any exit charges in writing, and confirm whether the facility is recourse or non-recourse. The cheapest headline rate can become the most expensive facility if the exit terms are punitive.
Frequently Asked Questions
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Is invoice factoring regulated in the UK?
B2B invoice factoring is not regulated by the Financial Conduct Authority. That keeps costs down, but it also means you carry the diligence: check any provider for hidden fees and read the contract terms before committing. The industry’s voluntary backstop is the UK Finance invoice finance code of conduct, so it is worth confirming a provider’s membership.
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Is invoice factoring a loan?
No. Factoring is asset-based finance, not a loan: you are selling an asset (the invoice) rather than borrowing against secured debt. Nothing new is borrowed or charged, which is part of why it can be available to businesses a lender would decline.
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How much does it cost to factor invoices?
Expect a discount charge of roughly 1.5% to 5% of invoice value plus a service fee of around 1% to 2% of turnover, with the exact numbers driven by your customers’ credit quality, your sector and the size of the facility. Always ask for the full list of additional fees before you sign.
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What is the difference between invoice finance and factoring?
Invoice finance is the umbrella term for funding raised against your unpaid invoices. Factoring is the most common type of it, alongside invoice discounting. So all factoring is invoice finance, but not all invoice finance is factoring.