Invoice Factoring

Invoice factoring lets a business sell its unpaid invoices to a lender — the factor — in exchange for an immediate cash advance, typically 70–90% of the invoice value. The factor then collects payment directly from the business’s customers. When the customer pays, the factor releases the remaining balance minus its fees.

The key distinction from invoice discounting: with factoring, the factor manages credit control. The business’s customers know a third party is involved.

How Invoice Factoring Works

Step 1 — Issue invoice
The business completes work or delivers goods and raises an invoice with standard payment terms (30, 60, or 90 days).

Step 2 — Submit to factor
The invoice is assigned to the factoring company. This can happen the same day via an online portal.

Step 3 — Receive advance
The factor pays an advance — typically 80–90% of the invoice face value — directly into the business’s account, usually within 24 hours.

Step 4 — Factor collects
The factor’s credit control team contacts the customer and manages the payment process. The business has no further involvement in chasing payment.

Step 5 — Final payment released
When the customer pays, the factor releases the remaining balance minus its fees (the discount fee and service charge).

What Invoice Factoring Costs

Factoring carries two cost components:

Discount rate (or discount fee)
Charged on the value of invoices drawn against — typically 1–3% for a 30-day period. Equivalent to the interest on the advance. [VERIFY current market rate ranges — HUMAN CONFIRMATION NEEDED]

Service charge (or factoring fee)
Covers the credit control service — chasing payments, producing statements, managing the sales ledger. Typically 0.5–2.5% of annual turnover. [VERIFY — HUMAN CONFIRMATION NEEDED]

Some providers charge a minimum monthly fee. Others charge an arrangement fee at setup. The total cost depends heavily on the volume of invoices, the creditworthiness of the business’s customers, and whether the facility is recourse or non-recourse.

Recourse vs non-recourse
With recourse factoring, the business remains liable if a customer does not pay. The factor can “charge back” the invoice to the business. With non-recourse factoring, the factor absorbs bad debt risk — at higher cost. Most UK factoring is recourse.

Who Invoice Factoring Is For

Factoring suits businesses that:

• Have 30–90 day payment terms with trade customers
• Are growing faster than their cash flow supports
• Do not have the resource or appetite to run an internal credit control function
• Have customers with acceptable credit quality (the factor is effectively lending against those customers’ ability to pay)

It is less suitable for businesses that trade with consumers (B2C), receive immediate payment, or have very short invoice cycles where the speed advantage is minimal.

Minimum requirements vary by provider. Many require a minimum annual turnover (commonly £100,000–£250,000) and a minimum number of invoices or debtors. Single-debtor concentration — where one customer represents the majority of the ledger — can complicate approval or attract a higher rate.

The Credit Control Trade-Off

Handing credit control to a third party has consequences in both directions.

The upside: businesses that struggle to chase payment systematically often collect faster and more consistently once a professional team handles it. Late payment is reduced. The internal admin burden disappears.

The downside: customers know the business uses a factor. Some customers — particularly larger corporates — may view this unfavourably, though this has become less significant as factoring has grown more common. The factor’s communication style may not match how the business would handle sensitive customer relationships.

If customer relationship management is critical, invoice discounting — where the business retains credit control and the financing is confidential — is typically the better fit.

Comparing Providers

Providers differ on:

• Advance rates — the percentage of the invoice released upfront
• Discount rate — the daily or monthly cost of the advance
• Service charge — the cost of the credit control function
• Recourse terms — how quickly a chargeback is triggered and what protection exists
• Concentration limits — how much exposure to a single debtor is permitted
• Minimum fees — whether a minimum monthly charge applies regardless of usage
• Sector appetite — some factors are more active in construction, recruitment, or manufacturing

Invoice Factoring vs Invoice Discounting

Related Pages

• Invoice Discounting
• Selective Invoice Finance
• Spot Factoring
• Invoice Factoring vs Invoice Discounting
• Recourse vs Non-Recourse Invoice Finance
• Factoring Credit Control Explained
• Invoice Finance Fees Comparison
• Working Capital Finance