What is Invoice Factoring and How Does it Work?

Factoring is not the cheapest money you will ever borrow, and it was never meant to be. You are buying two things at once: the cash, and somebody else to do the chasing. Whether that is worth the fee depends on what the money lets you do, and on how much of your week currently disappears into unpaid invoices.

What Is Invoice Factoring?

Invoice factoring is a form of invoice finance where you assign your outstanding invoices to a factor 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 charges.

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. That is the defining feature, and the main thing to weigh before you sign: you get the cash quickly, but you hand your customer relationships and collections to someone else. If your finance function is one part-time bookkeeper, that hand-off is often the main reason to choose factoring in the first place.

We checked the advance rates the major factors publish, and they cluster in a narrow band. Lloyds advertises up to 90%, Bibby Financial Services up to 85% on factoring, and the British Business Bank describes advances of up to around 90% as the general market position. The number you are actually offered depends on your customers rather than on you, which is the whole logic of the product.

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 charges.

The factor underwrites your customers’ ability to pay rather than your own. 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.

Setting Up a Facility vs Funding an Invoice

The “cash within 24 hours” promise in the advertising is true, but only of a facility that is already running. Getting to that point takes considerably longer, and conflating the two is how businesses end up disappointed in week one.

A whole-ledger facility funds your entire sales ledger rather than invoices you pick. Setting one up means the factor reviews the aged debtor report, runs know-your-customer and company checks, samples invoices and contracts, issues an offer, draws up the facility agreement, and arranges notice of assignment so customers pay the right account. Two to four weeks is a realistic expectation for a straightforward book, and longer where the ledger is complicated or the paperwork is thin. If you need money this Friday for a payroll run, factoring set up from scratch will not get it to you.

Once the facility is live, the cycle is short: raise and upload the invoice, wait for the eligibility check, receive the advance, then wait for the customer to pay before the balance is released less charges. That second loop is the one that runs in a day or two.

A Worked Example

Say you raise a £20,000 invoice on 60-day terms and factor it at an 80% advance rate. The factor pays you £16,000 straight away and holds £4,000 back as the reserve. It also takes over collections, so you are not the one chasing for two months.

The cost is built from two separate charges, and this is where most published examples go wrong by quoting a single unexplained figure. Take a service fee of 1.5% of invoice value and a discount rate of 6.75% a year, being Bank Rate at 3.75%, held on 30 July 2026, plus a 3% margin. The arithmetic runs like this:

• Service fee: £20,000 × 1.5% = £300
• VAT on the service fee at 20% = £60
• Discount charge: £16,000 × 6.75% × 60 ÷ 365 = £177.53 (no VAT, see below)
• Total cost: £537.53, or 2.69% of the invoice

When your customer settles the full £20,000, the factor releases the £4,000 reserve less those charges, so you receive £3,462.47. Across the deal you have collected £19,462.47 of a £20,000 invoice. Whether £537.53 is worth paying comes down to one test: what £16,000, eight weeks early, lets you do that waiting would not.

What Invoice Factoring Costs

Factoring pricing has two main components that behave completely differently, plus a tail of smaller charges that rarely appear in the headline quote. We rate the confusion between those two charges as the commonest error in how this product is described, and it matters: one is charged on turnover, the other on the money actually drawn.

Service Fee

The service fee is the administration and credit-control charge. It pays for the factor running collections on your behalf, and we found it quoted three different ways across the market: as a percentage of invoiced turnover, as a percentage of invoice value, or as a flat monthly charge. Check which of the three a quote uses before setting it against another, because a percentage of turnover and a percentage of each invoice are not the same number when invoicing is uneven.

What moves the service fee up or down is the work behind it rather than the size of the loan: how many invoices you raise, how many customers sit on the ledger, how much chasing each one needs, and whether the factor is also running credit checks and reporting for you. A business raising forty small invoices a month costs a factor more to service than one raising four large ones, even where the turnover matches. That is why a quote you were given two years ago at a different invoice volume is not a useful benchmark now.

Almost every facility also carries a minimum monthly or annual fee, and that is where seasonal businesses get stung. On a 1.5% service fee with a £500 monthly minimum, a quiet January invoicing £4,000 costs £500 rather than £60. That is 12.5% of turnover for one month of the service. Nothing in the headline rate warns of it.

Discount Charge

The discount charge is the cost of the money itself, and it works like interest on a bank overdraft rather than like a fee on an invoice. It is normally quoted as a reference rate plus the provider’s margin, with Bank Rate plus 2% to 4% a common shape, and it accrues on the amount you have drawn for the number of days it stays drawn. We use Close Brothers as the reference here because it publishes its pricing in exactly that shape: a service fee, plus a discount fee calculated against the daily outstanding balance.

We publish the formula because it lets you check any quote yourself:

Discount charge = amount advanced × annual discount rate × days outstanding ÷ 365

You will still see the discount charge described elsewhere as “1.5% to 5% of invoice value”. Treat that with suspicion. A percentage of invoice value with no time period attached cannot describe a charge that accrues daily, and a customer who pays in 30 days should not cost you the same as one who takes 90.

Other Fees

The charges that do not show up in the headline rate are the ones worth asking about in writing:

• Arrangement or setup fee: a one-off charge for onboarding the facility.
• Audit or survey fee: for the review of your sales ledger. Ask whether it recurs annually.
• Minimum monthly or annual fee: payable whether you use the facility or not.
• Refactoring or transaction charges: applied on some facilities when an invoice runs past its due date.
• Bad-debt protection premium: priced separately from the finance charge on non-recourse facilities.
• Notice period and termination charges: the cost of leaving, which is easy to ignore until you want to.

These matter most on a facility you expect to hold for a year or less. A £1,500 arrangement fee spread across five years barely registers; the same fee on an eighteen-month facility is a real part of what the money costs you, and it is charged whether the facility works out or not. Price them against how long you actually expect to need the funding, not against the headline percentages.

Ask for every chargeable item in writing before you commit. If a provider will not put the full fee schedule on paper up front, treat that as a reason to walk away rather than a detail to sort out later.

Does VAT Apply to Invoice Factoring Fees?

VAT does not apply evenly across a factoring bill, and this is one of the few places where getting the detail right saves real money. We took the treatment below from HMRC’s own manuals rather than from provider summaries, because HMRC treats the credit element and the service element as different supplies.

Source: HMRC VAT Finance Manual VATFIN3220 and VAT Notice 701/49, checked 21 August 2026. If you are VAT-registered you will recover the standard-rated element in the normal way, so this lands hardest on businesses that are not.

The All-In Cost, Worked

We ran the same £20,000 invoice, on the same terms, across three funding periods. Only the discount charge moves, because only the discount charge is time-based:

Assumptions: £20,000 invoice, 80% advance (£16,000 drawn), service fee 1.5% of invoice value, discount rate 6.75% a year (Bank Rate 3.75% at 21 August 2026 plus a 3% margin), no arrangement, audit or minimum fees applied. Change any one of those and the total moves, which is the point of showing the workings rather than a single average.

Read down the right-hand column and you can see what a slow payer actually costs you: an extra £177.53 on one invoice for the customer who takes 90 days instead of 30. Across a ledger of thirty invoices a month, that is the difference between a facility that pays for itself and one that quietly does not. These figures are illustrative rather than a quote, and they are not an APR. Annualising a factoring cost properly needs a recognised methodology this example does not attempt.

How Much Cash You Can Actually Draw

A 90% advance rate does not mean 90% of your sales ledger arrives in your account. The advance rate is applied to eligible debt, and the gap between your total ledger and your eligible ledger is where most of the disappointment in this product lives.

What shrinks the eligible pool is rarely one big exclusion; it is four ordinary ones stacking up. Concentration limits cap how much the factor will fund against any single customer, often between 20% and 40% of the book, so a business where one client is half the revenue may find a large slice of its biggest invoices outside the facility entirely. Invoices past a set age, commonly 90 or 120 days, drop out. Anything in dispute drops out immediately and stays out until the dispute settles. Frequent credit notes make the factor hold back more, because credit notes reduce what it can eventually collect.

We recommend asking for a worked availability figure against your own aged debtor report rather than a headline percentage. A factor quoting 90% against an eligible book that turns out to be 60% of your ledger is offering you less cash than one quoting 80% against 90% of it. That single question separates a useful quote from a marketing number, and any provider worth signing with will answer it.

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.

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. Our full comparison of invoice factoring and invoice discounting works through the decision in detail.

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. The period before that happens, often 90 or 120 days past the due date, is set out in your agreement. It is worth knowing, because it tells you when a cash-flow reversal would land.

Non-recourse factoring, usually sold as bad-debt protection, transfers some of that risk to the factor for an extra premium. What it does not do is cover every reason an invoice goes unpaid, and we found the marketing rarely makes that clear. Protection normally applies only to customers the factor has approved in advance, only up to a credit limit it has set for each of them, and only on properly documented invoices. Close Brothers sets its cover out on exactly those terms.

Read the exclusions before you price the premium against the peace of mind. A commercial dispute over the work is typically not covered, because the customer is not insolvent, just unhappy. Credit notes, fraud, invoices raised outside the approved limit and debts from customers the factor never approved usually fall outside too. In practice the cover protects you against a customer going under, not against a customer arguing.

Whether the premium is worth paying depends on your own bad-debt history and how concentrated your ledger is. 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. Our guide to recourse and non-recourse invoice finance covers the mechanics in more depth.

Who Invoice Factoring Is For

Factoring works for businesses that invoice other businesses on credit terms and wait too long to get paid. 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.

It also suits businesses where credit control is the real burden rather than the cash. If your accountant spends a day a week chasing late payers, handing collections to the factor buys that day back. Government figures put the scale of the problem at around £26bn owed in late payments at any one time, affecting roughly 1.5 million businesses a year, with the firms affected losing an average of 86 hours annually to chasing. That is context for why the product exists, not an argument that it suits everyone.

In assessing you, a factor will look at the size and source of your invoices, your payment terms, the risk in your customer base, and your own trading record, in roughly that order of importance.

Can Start-Ups Use Invoice Factoring?

Sometimes, and more often than for unsecured lending, but it is not the open door it is occasionally presented as. Factoring can be more accessible to a young business than a bank loan because the factor is underwriting your customers rather than you, so a new agency with blue-chip clients has something to offer that a bank overdraft application does not.

Providers still assess trading history, annual invoiced turnover, sector, documentation quality and the makeup of the debtor book, and their appetite for new starts varies widely from one to the next. Some specialise in it; others set minimum turnover or trading-history requirements that rule it out. Ask each provider directly what its new-start position is rather than assuming the market has one.

Which Invoices Can Be Factored?

Not every invoice is fundable, and knowing which is which before you apply saves a wasted conversation. We grade the common cases like this:

Treat these as the starting position rather than a ruling. A specialist factor in construction or export will take on cases a generalist declines, which is why the answer to “can I factor this?” often depends on which provider you ask.

When Factoring Is a Poor Fit

It does not work if you sell to consumers or get paid at the till; there is no credit-term invoice to fund. Thin margins are the other common mismatch: a facility costing 2% to 3% of invoice value eats a meaningful share of a 10% gross margin and very little of a 50% one.

Businesses whose invoices are routinely queried or project-dependent struggle too, since disputed debt is not fundable and the ledger keeps moving. Where confidential collections genuinely matter, as in a small client base where the relationship is the asset, invoice discounting is the product to look at instead.

Pros and Cons of Invoice Factoring

Is Invoice Factoring Regulated in the UK?

Less than most people assume, and the answer is more precise than a simple yes or no. Three separate things get muddled together in this market, and a provider can be truthful about one while leaving you with the wrong impression of the other two.

The first is whether the contract is regulated. We checked the FCA’s own published position on business lending: commercial lending to a limited company generally sits outside the consumer-credit regime, so most invoice finance agreements are not regulated credit agreements. Where the borrower is a sole trader or a small partnership, the position can differ with the structure of the arrangement, so a sole trader should not assume the same answer applies.

The second is whether the firm is FCA-authorised. Many factors sit inside regulated banking groups, and that is worth knowing, but it does not make the invoice finance contract itself a regulated one. The third is FCA registration, which is a different thing again: firms carrying on factoring can fall within anti-money-laundering registration requirements without being authorised to conduct regulated activities. A provider that says it is “FCA registered” has not told you it is FCA authorised.

What fills the gap is an industry framework rather than a statutory one. UK Finance and the Professional Standards Council maintain the Invoice Finance and Asset-Based Lending Standards Framework, which sets a code its members sign up to and provides an independent complaints process for their clients. Membership is voluntary, so check whether the provider you are talking to is in it, and understand that the complaints route it offers is not the Financial Ombudsman Service. We confirmed the framework and its complaints route from UK Finance directly; it reports its IF/ABL members funding well over £20bn to UK client businesses at any one time.

All of which leaves the diligence with you. Read the contract, price the exit terms, and get the fee schedule in writing.

Can a Contract Stop You Factoring an Invoice?

It used to, routinely. Large customers would write a ban on assignment into their supply contracts, and a supplier who had signed one could not use its own invoices to raise finance. The Business Contract Terms (Assignment of Receivables) Regulations 2018 changed that for most ordinary trading relationships, rendering many such restrictions ineffective.

The Regulations do not make every receivable freely assignable, though, and the exclusions are real rather than technical. Certain contract types and certain parties fall outside them, and a term that restricts assignment may still bite where an exclusion applies. Where a customer contract contains an assignment clause and the factor raises it, that is a question for a solicitor rather than something to argue from the legislation directly.

Raise it early either way. A factor reviewing the ledger will ask about assignment restrictions during onboarding, and finding one on the largest customer at the offer stage beats finding it after everything is signed. The full text sits at legislation.gov.uk.

Selective, Spot and Reverse Factoring

You do not always have to factor the whole ledger. Selective invoice finance and spot factoring let you fund individual invoices you choose, which suits a business where 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 and commits you to nothing ongoing, which is the trade being made. We treat it as a different decision from whole-ledger factoring rather than a cheaper version of it.

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 Compare Invoice Factoring Providers

Terms vary widely on price, advance rate, contract length and exit cost, so compare more than one and do not sign on the headline rate alone. Of the fourteen fields we set side by side, exit terms are the one most often left until last and the one most likely to cost you.

The quickest route to whole-of-market options is 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.

The All-In Quote Decoder

Two quotes are only comparable once the same fourteen fields sit next to each other. These are the ones we compare, and they are worth asking for in writing:

Run both quotes through the worked example above on your own numbers before you choose. A provider quoting a lower service fee but a higher margin can easily cost more on a ledger that pays in 75 days, and the two headline percentages will not show you that.

Credit-Control Standards to Agree

Factoring is the only funding product that puts a third party in front of your customers, so we treat the collections process as deserving the same scrutiny as the price. Agree these before the facility goes live, and get the answers in the same document as the fees:

• Whose name appears on payment reminders and statements?
• Can the tone and wording of chasing letters be agreed in advance?
• Who handles a dispute, and how quickly does it come back to you?
• Can you set different contact rules for key accounts?
• What reporting do you get on collection activity, and how often?
• At what point does the factor escalate, and what does escalation involve?

A factor that answers these crisply has thought about it. One that treats them as an afterthought is telling you something useful about how your customers will be handled. Our guide to how factoring credit control works goes through the process in detail.

Frequently Asked Questions

• Is invoice factoring regulated in the UK?

  Mostly not, but the answer depends on your legal structure. Commercial lending to a limited company generally sits outside the FCA’s consumer-credit regime, so most invoice finance contracts are not regulated credit agreements. Arrangements involving sole traders or small partnerships can fall differently. Note also that an FCA-authorised firm and an FCA-registered firm are not the same thing: factoring businesses can be registered for anti-money-laundering purposes without being authorised.

  UK Finance members sign up to the Invoice Finance and Asset-Based Lending Standards Framework, which includes a code and an independent complaints process, but that is an industry framework rather than statutory regulation.

• Is invoice factoring a loan?

  Invoice factoring is receivables-based commercial finance rather than a conventional fixed-term business loan. You are raising money against invoices you have already earned, which is why it can be available to businesses a lender would decline. It is not accurate to say nothing is borrowed: the legal and accounting treatment depends on how the facility is structured, including whether it is recourse or non-recourse and how far the risks and rewards actually transfer. The British Business Bank describes invoice finance as funding advanced against unpaid invoices. Recourse is the pivot. Where the factor can come back to you for an invoice that is never paid, the risk has not left your books, whatever the facility is called.

• How much does it cost to factor invoices?

  There are two separate charges and they are measured differently. The service fee covers administration and collections and is quoted as a percentage of turnover or invoice value, or as a fixed charge. The discount charge is the cost of the money and works like interest: it is quoted as a reference rate plus a margin and accrues on the amount advanced for the days it stays outstanding.

  On our worked example, a £20,000 invoice at an 80% advance, a 1.5% service fee and 6.75% a year funded for 60 days, the total came to £537.53, or 2.69% of the invoice. Treat any single “typical percentage” with no time period attached as unreliable, and ask about minimum monthly fees, arrangement and audit charges and exit terms before you sign.

• Do you pay VAT on invoice factoring fees?

  Not on all of it. HMRC treats the discount or finance element as generally exempt, while the administration or service fee and any bad-debt protection element are normally standard-rated at 20%. A separately identified electronic funds transfer charge can also be exempt. Treatment follows how the service is actually supplied and invoiced, so the split shows on the fee schedule itself, line by line. Source: HMRC VAT Finance Manual VATFIN3220 and VAT Notice 701/49, checked 21 August 2026.

• What happens if my customer never pays?

  On a recourse facility the debt comes back to you after an agreed period, commonly 90 or 120 days past the due date, and you repay the advance. On a non-recourse facility with bad-debt protection the factor carries the loss instead, but only for customers it approved in advance, only up to the credit limit it set for each of them, and only on properly documented invoices. Commercial disputes, credit notes, fraud and debts from unapproved customers are typically excluded. Check your own agreement for the recourse period and the exclusions.

• Which invoices can I factor?

  Business-to-business invoices for work you have completed and delivered, where the customer is not disputing the charge and the invoice is not too old. Consumer invoices and till takings cannot be factored at all. Overseas debtors, construction applications with retentions, stage payments and ledgers with heavy customer concentration need a specialist provider rather than a flat refusal. A contractual ban on assignment may also be ineffective under the Business Contract Terms (Assignment of Receivables) Regulations 2018, though exclusions apply and it is worth taking advice on a specific clause.

• 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.

How We Research Invoice Factoring Costs

We source every figure on this page to a named, dated document rather than to a market average, because market averages for factoring hide more than they reveal. Fee structures differ by denominator, facilities differ by what they include, and a single blended percentage cannot describe a charge that accrues daily alongside one that does not.

For product mechanics and advance rates we use the British Business Bank’s invoice finance guidance, alongside the published product pages of Lloyds, Bibby Financial Services and Close Brothers Invoice Finance. Close Brothers is the clearest published example of the two-part pricing structure described above. For VAT we use HMRC’s VAT Finance Manual and VAT Notice 701/49. For the regulatory position we use the FCA’s own material on the business-lending perimeter and on anti-money-laundering registration, and the UK Finance Invoice Finance and Asset-Based Lending Standards Framework.

Bank Rate is the Bank of England’s published rate, 3.75% following the decision of 30 July 2026, with the next decision due 17 September 2026.

Where we use provider figures we treat them as that provider’s published position on the date we checked it, not as evidence of what the market charges. The worked examples are illustrative calculations built from stated assumptions, so you can substitute your own numbers and get an answer that applies to your ledger. All sources on this page were checked on 21 August 2026.