What Is Invoice Factoring?

Invoice factoring advances you cash against unpaid invoices and hands over the job of chasing customers for payment to the lender. You get the cash flow benefit of invoice finance with the administrative overhead of credit control taken off your plate. The trade off is visibility. Your customers know a finance provider is involved, and the arrangement is not confidential.

For many businesses, that trade off works clearly in their favour. If you are growing fast, do not yet have a credit control function in place, or simply want to stop spending time chasing invoices, factoring removes that problem entirely. The lender manages your collections, ages your debts, and chases late payments. You focus on generating the work.

Factoring is the more accessible form of invoice finance. Turnover thresholds are lower, eligibility criteria are less demanding, and it is the natural starting point for businesses that are not yet big enough, or not yet organised enough internally, for invoice discounting. For a broader overview of how invoice finance works across all its forms, see our guide to what invoice finance is.

How invoice factoring works

The mechanics follow the same pattern as any invoice finance facility. You raise an invoice to a business customer and notify your lender. They advance you typically 80 to 90% of the invoice value, usually within 24 to 48 hours. When the invoice is paid, the remaining balance is released to you minus the lender's fees.

What makes factoring distinct is what happens in between the advance and the payment. Rather than leaving credit control with you, the lender takes it over entirely. They send payment reminders in their own name, manage the aged debt process, and chase overdue invoices directly with your customer. Your customer knows they are dealing with a factoring company and makes payment directly to the lender's account.

When the facility starts, your customers receive a notice of assignment telling them that your invoices have been assigned to a lender and that future payments should go to the lender's account. This is a standard document and most business customers accept it without issue. Invoice factoring is common enough across UK industries that it carries no particular stigma.

Because the lender is managing collections, the facility requires less from you on an ongoing basis than invoice discounting. The main thing you need to keep on top of is the quality of the invoices you raise. Disputed or invalid invoices cannot be funded, and a high dispute rate will affect your facility terms over time.

Who invoice factoring is for

Factoring is more accessible than invoice discounting. Most lenders will work with businesses from around £50,000 to £100,000 in annual turnover, and some will consider businesses in their first year of trading if the invoicing profile is clean and the customers are creditworthy.

The typical factoring customer is a B2B business that:

• Sells to other businesses on payment terms of 30 days or more

• Does not have a dedicated credit control function in place

• Has annual turnover between £50,000 and £500,000

• Wants to remove the admin burden of chasing invoices as well as accessing the cash

Take an IT contractor who has grown from working solo to running a small team of three. They are billing £200,000 a year to a handful of business clients on 60-day terms, and the time spent chasing invoices is time spent away from the work. Factoring advances the cash within 24 hours of an invoice being raised and removes the collections process entirely. The clients know the lender is involved and it makes no practical difference to them.

Factoring is also the standard product in sectors where managing credit control in-house is particularly demanding. Staffing agencies pay contractors weekly while billing clients monthly, creating a cash flow gap that recurs every week. Specialist factoring providers in the recruitment sector typically offer integrated payroll support alongside the facility. Our guide to recruitment invoice finance covers that specific application in detail.

What invoice factoring costs

Factoring fees are built from two main components, the same structure as invoice discounting but at higher rates because the lender is taking on more of the work.

The discount rate is the interest charge on the advance. It is calculated daily on the outstanding balance and is typically quoted as the Bank of England base rate plus a margin. For factoring, the all-in annualised rate generally falls between 2% and 4%, slightly above the equivalent discounting rate.

The service fee covers the lender's administration and credit management. It is calculated as a percentage of your total monthly invoiced turnover. For factoring, expect 0.5% to 2.5%, compared to 0.2% to 0.5% for discounting. The higher rate reflects the credit control function the lender is absorbing on your behalf.

Beyond these two headline costs, check for ancillary charges before signing: audit fees, minimum monthly fees, bad debt protection premiums if you opt for non-recourse cover, and early termination penalties. These vary significantly between providers and can add materially to the total cost if you are not comparing like for like.

For a full breakdown of how factoring fees are structured, with worked examples of what a facility typically costs at different turnover levels, see our guide to invoice factoring rates.

Invoice factoring vs invoice discounting

The core difference is credit control and confidentiality. With factoring, the lender manages your collections and your customers know the arrangement exists. With discounting, you manage collections yourself and the arrangement stays confidential.

Factoring costs more on headline fees because the lender is doing more work. Discounting is cheaper but requires your business to handle collections in-house and to meet a higher turnover threshold to qualify. If you already have a functioning credit control team, discounting is usually the lower total-cost option. If you do not, the cost of building or outsourcing that function narrows the gap considerably.

For most businesses, factoring is the entry point and discounting is where you aim to move once you have the turnover, the trading history, and the internal infrastructure to qualify. The transition when you get there is well-supported by lenders and does not require starting the relationship from scratch. Our guide to invoice discounting vs factoring covers the full comparison in detail.

Is invoice factoring right for your business?

Factoring suits B2B businesses that need to release cash from unpaid invoices and want credit control handled externally. It works particularly well for businesses in the £50,000 to £500,000 turnover range, those without a dedicated finance function, and sectors where the credit management overhead is high relative to team size.

The main question to work through before applying is whether your customers being notified is a problem. In most industries it is not. Factoring is common and well understood, and most business clients accept the notice of assignment without comment. If it is an issue in your particular sector or with a specific client relationship, invoice discounting is the product to wait for.

For businesses that fit the profile, factoring is worth getting a quote for alongside a business overdraft or short-term loan. The all-in cost is often comparable once you account for the credit control overhead being removed from your own team. You can get an invoice finance quote through HowMuch and compare options from multiple providers.

Frequently asked questions

What is the difference between invoice factoring and invoice discounting?

With factoring, the lender takes over your credit control and chases your customers for payment. Your customers know the arrangement exists. With discounting, you manage collections yourself and the arrangement stays confidential. Factoring costs more in fees but requires less from you operationally. Discounting is cheaper but requires a functioning credit control function and a higher turnover threshold to qualify.

Will my customers know I am using invoice factoring?

Yes, in a standard disclosed arrangement. When the facility starts, your customers receive a notice of assignment telling them to make future payments to the lender's account. The lender then contacts them directly to chase payment. Some providers offer confidential factoring at a higher cost, but disclosed factoring is the standard. If confidentiality is essential, invoice discounting is the more practical solution.

How quickly will I receive funds after raising an invoice?

Most lenders advance funds within 24 to 48 hours of an invoice being submitted. Once your facility is live and integrated with your accounting software, the process is largely automatic. The advance typically arrives the next working day once the lender has processed the invoice.

What happens if my customer does not pay?

This depends on whether your facility is recourse or non-recourse. With recourse factoring, if the customer does not pay, you are liable to repay the advance to the lender. Non-recourse factoring transfers that credit risk to the lender at a higher cost. Non-recourse cover is worth pricing if you have significant exposure to a small number of large clients or operate in a sector with a higher-than-average bad debt rate.

Can a new business use invoice factoring?

Yes, in many cases. Factoring providers assess the creditworthiness of your customers more heavily than your own trading history, which makes the product more accessible for newer businesses than discounting. If you are invoicing creditworthy clients on standard payment terms, some lenders will consider businesses from their first year of trading. Requirements vary between providers, so it is worth comparing options rather than approaching a single lender.