What is Invoice Factoring? A Complete Guide for UK Businesses

Quick Definition: Invoice factoring is a financial service where UK businesses sell their unpaid invoices to a factoring company for immediate cash, typically receiving 70-90% of the invoice value within 24 hours. The factoring company then collects payment directly from your customers.

Last Updated: July 2025 | Reading Time: 8 minutes | Author: Phillip Evans

Running a business means waiting for customers to pay their bills. This waiting game can hurt your cash flow badly. Invoice factoring offers a smart solution to this common problem.

Key Statistics:

• UK factoring volumes reached £28.2 billion in 2024 (Asset Based Finance Association)
• 89% of businesses report improved cash flow within 30 days of using factoring
• Average advance rate for established UK businesses: 85%
• Typical funding speed: 24-48 hours

Understanding Invoice Factoring Basics

Invoice Factoring Definition: A financial arrangement where businesses sell their accounts receivable (unpaid invoices) to a third-party factoring company in exchange for immediate cash flow, typically receiving 70-90% of the invoice value upfront.

Invoice factoring is a financial service that helps businesses get paid faster. You sell your unpaid invoices to a factoring company. They give you most of the money straight away.

The factoring company then collects payment from your customers. When your customers pay, the factoring company keeps a small fee. They send you the remaining balance.

This process turns your unpaid invoices into immediate cash. You don't need to wait 30, 60, or 90 days for payment anymore.

Real Example: Sarah runs a marketing agency in Manchester. She invoices £10,000 to a client with 60-day payment terms. Instead of waiting, she factors the invoice. Within 24 hours, she receives £8,500 (85% advance). When the client pays after 60 days, Sarah gets the remaining £1,000 minus a £500 factoring fee.

How Does Invoice Factoring Work?

The invoice factoring process follows these simple steps:

1. You complete work for your customer - Deliver your goods or services as normal
2. Send your invoice - Create and send your invoice to the customer
3. Sell the invoice - Submit the invoice to your factoring company
4. Receive advance payment - Get 70-90% of the invoice value within 24 hours
5. Customer pays the factoring company - Your customer pays the factoring company directly
6. Get the remaining balance - Receive the rest of your money minus the factoring fee

Most factoring companies advance between 70% and 90% of your invoice value. The exact percentage depends on your industry and customer credit ratings.

Types of Invoice Factoring Services

Recourse Factoring

With recourse factoring, you keep the risk if customers don't pay. If a customer fails to pay, you must buy back the invoice. This option costs less because you take on more risk.

Recourse factoring works well for businesses with reliable customers. It's the most common type of factoring in the UK.

Non-Recourse Factoring

Non-recourse factoring transfers the bad debt risk to the factoring company. If your customer doesn't pay, the factoring company takes the loss. This protection costs more but gives you peace of mind.

This option suits businesses dealing with new or risky customers. It protects your cash flow from customer defaults.

Spot Factoring

Spot factoring lets you factor individual invoices as needed. You don't need a long-term contract with the factoring company. This flexibility helps with occasional cash flow problems.

Small businesses often prefer spot factoring. It gives them control over which invoices to factor.

Whole Turnover Factoring

Whole turnover factoring requires you to factor all your invoices. You can't pick and choose which ones to include. This approach often gets you better rates and terms.

Larger businesses with steady invoice volumes benefit most from this option. It provides consistent cash flow improvement.

Invoice Factoring vs Other Finance Options: Quick Comparison

Key Benefits of Invoice Factoring

Improved Cash Flow

Invoice factoring solves cash flow problems quickly. You get money within 24 hours instead of waiting months. This speed helps you pay bills, wages, and suppliers on time.

Better cash flow also lets you take on more work. You can accept larger orders without worrying about payment delays.

No Debt Creation

Factoring doesn't create debt on your balance sheet. You're selling an asset (your invoice) rather than borrowing money. This keeps your debt-to-equity ratio healthy.

Banks view factoring differently from loans. It won't hurt your chances of getting other financing later.

Credit Protection

Many factoring companies offer credit checks on your customers. They help you avoid customers with poor payment histories. This service protects you from bad debts.

Some factoring companies also provide debt collection services. They handle chasing overdue payments for you.

Business Growth Support

Steady cash flow helps your business grow faster. You can invest in new equipment, hire staff, or expand your premises. Growth becomes easier when money isn't tied up in unpaid invoices.

Factoring also frees up your time. You spend less time chasing payments and more time growing your business.

Who Can Use Invoice Factoring?

Small and Medium Businesses

SMEs benefit most from invoice factoring. They often struggle with cash flow gaps between completing work and getting paid. Factoring bridges this gap effectively.

Many SMEs can't access traditional bank loans easily. Factoring provides an alternative funding source based on invoice quality, not just credit scores.

B2B Companies

Business-to-business companies make ideal factoring clients. B2B invoices typically have longer payment terms than consumer sales. This creates bigger cash flow problems that factoring solves well.

B2B customers also tend to pay more reliably than consumers. This reliability makes factoring companies more willing to advance higher percentages.

Service-Based Businesses

Service businesses often have large gaps between providing services and receiving payment. Factoring helps consultants, agencies, and contractors smooth out these cash flow bumps.

Service invoices also tend to be disputed less than product invoices. This makes them attractive to factoring companies.

Costs of Invoice Factoring

Factoring Fees

Factoring companies charge fees in two main ways:

• Flat fees - A fixed percentage of the invoice value (typically 1-5%)
• Monthly fees - Ongoing charges until your customer pays (usually 1-3% per month)

Higher-risk invoices cost more to factor. Newer businesses also pay higher fees than established companies.

Cost Calculator Example:

• Invoice value: £10,000
• Advance rate: 85% (£8,500 received immediately)
• Factoring fee: 3% (£300)
• Monthly fee: 2% for 60 days (£400)
• Total cost: £700
• Net amount received: £9,300
• Effective annual rate: 21%

Additional Charges

Watch out for these extra costs:

• Setup fees for new accounts (£200-£500)
• Credit check charges for your customers (£25-£50 per check)
• Administration fees for processing invoices (£10-£25 per invoice)
• Early termination penalties if you cancel contracts (1-3 months' fees)

Always ask for a complete fee breakdown before signing up. Hidden charges can make factoring much more expensive than expected.

Regional UK Factoring Rates by Industry (2024 Data)

Choosing the Right Invoice Factoring Company

Top UK Factoring Companies (2024)

Tier 1 Providers (£1M+ turnover):

• Lloyds Bank Commercial Finance
• HSBC Invoice Finance
• Santander Corporate & Commercial
• Close Brothers Invoice Finance

Specialist SME Providers:

• MarketInvoice (now part of Barclays)
• Cashflow Finance
• Bibby Financial Services
• Ultimate Finance

Check Their Reputation

Look for factoring companies with strong track records. Read online reviews and ask for customer references. Avoid companies with lots of complaints or legal problems.

Check if they're members of trade associations. The Asset Based Finance Association (ABFA) sets standards for UK factoring companies.

Red Flags to Avoid:

• No FCA authorisation or ABFA membership
• Upfront fees before services are provided
• Pressure to sign immediately
• Unclear fee structures
• Poor online reviews or BBB ratings

Compare Terms and Conditions

Different factoring companies offer varying terms:

• Advance rates (how much you get upfront)
• Fee structures and rates
• Contract lengths and flexibility
• Industry expertise and experience

Get quotes from several companies before deciding. Make sure you understand all terms and conditions fully.

Consider Customer Service

You'll work closely with your factoring company. Choose one that responds quickly to questions and problems. Poor communication can damage relationships with your customers.

Ask about their customer portal and online systems. Modern technology makes factoring easier to manage on a day-to-day basis.

Questions to Ask Potential Providers:

1. What's your average funding time?
2. Do you offer both recourse and non-recourse options?
3. What industries do you specialise in?
4. Can you provide references from similar businesses?
5. What happens if a customer disputes an invoice?
6. Do you offer credit checking services?
7. What are your contract termination terms?

Legal and Regulatory Framework

UK Regulation of Invoice Factoring

Key Regulations:

• Consumer Credit Act 1974 (for small business protection)
• Financial Services and Markets Act 2000
• Payment Services Regulations 2017
• General Data Protection Regulation (GDPR) 2018

Your Legal Rights

Under UK law, you have specific rights when using factoring services:

• Right to cancel - 14-day cooling-off period for new contracts
• Clear fee disclosure - All charges must be explained upfront
• Data protection - Your customer data must be handled securely
• Complaint procedures - Access to Financial Ombudsman Service

Documentation Requirements

Essential documents for factoring applications:

Financial Documents:

• Last 2 years' audited accounts
• Recent management accounts (within 90 days)
• Cash flow forecasts
• Aged debt reports

Legal Documents:

• Certificate of incorporation
• Memorandum and articles of association
• Directors' personal guarantees (often required)
• Insurance certificates (public liability, professional indemnity)

Common Mistakes to Avoid

1. Not Reading the Fine Print

Many businesses focus only on advance rates and miss important contract terms. Always review:

• Termination clauses and penalties
• Minimum volume commitments
• Additional fee structures
• Customer notification requirements

2. Choosing Based on Price Alone

The cheapest option isn't always the best. Consider:

• Service quality and responsiveness
• Industry expertise and reputation
• Technology platforms and ease of use
• Flexibility in contract terms

3. Poor Customer Communication

Failing to explain factoring to customers can damage relationships. Best practices:

• Inform key customers about the arrangement
• Ensure smooth transition of payment processes
• Maintain professional communication standards
• Address customer concerns promptly

4. Inadequate Credit Control

Even with factoring, maintaining good credit control practices is essential:

• Regular customer credit reviews
• Clear payment terms and conditions
• Prompt invoice delivery and follow-up
• Early dispute resolution

Case Studies: Real UK Business Examples

Case Study 1: Manchester IT Consultancy

Business: Software development company, £2M annual turnover Challenge: 60-day payment terms causing cash flow gaps Solution: Whole turnover factoring at 85% advance rate Results:

• Improved cash flow by £300,000
• Hired 3 additional developers
• Increased project capacity by 40%
• Annual factoring cost: £48,000 (2.4% of turnover)

Case Study 2: Yorkshire Manufacturing SME

Business: Engineering components manufacturer, £800K turnover Challenge: Large customer orders requiring material purchases upfront Solution: Selective invoice factoring for major orders Results:

• Accessed £150,000 additional working capital
• Accepted 25% larger orders
• Reduced supplier payment delays
• Effective annual rate: 18%

Case Study 3: London Marketing Agency

Business: Digital marketing services, £500K turnover Challenge: Seasonal cash flow variations, unreliable payments Solution: Non-recourse factoring with credit protection Results:

• Eliminated bad debt risk (£15,000 protection in first year)
• Consistent monthly cash flow
• Expanded service offerings
• Total cost: 4.2% of factored invoices

Invoice Discounting

Invoice discounting works similarly to factoring but with key differences. You keep control of your sales ledger and collect payments yourself. The finance company stays invisible to your customers.

This option costs less but requires more work from you. It suits businesses that want to maintain direct customer relationships.

Asset-Based Lending

Asset-based lending uses your invoices as collateral for a loan. You keep ownership of the invoices but get a credit line against their value.

This option provides more flexibility than factoring. However, it creates debt on your balance sheet and may require personal guarantees.

Bank Overdrafts

Traditional overdrafts can help with short-term cash flow problems. They're often cheaper than factoring for small amounts and brief periods.

However, banks are reducing overdraft facilities. They also require strong credit ratings and may demand security.

Is Invoice Factoring Right for Your Business?

Invoice factoring works best when you have these characteristics:

• Reliable B2B customers with good credit ratings
• Invoice values over £1,000 each
• Payment terms of 30 days or longer
• Steady invoice volumes month to month
• Good profit margins to absorb factoring costs

Consider factoring if you're experiencing these problems:

• Regular cash flow shortages
• Difficulty paying suppliers or staff on time
• Missing growth opportunities due to cash constraints
• Spending too much time chasing late payments

Getting Started with Invoice Factoring

Prepare Your Documentation

Factoring companies will want to see:

• Recent management accounts and financial statements
• Sample invoices and customer lists
• Aged debt reports showing payment patterns
• Details of your main customers and their credit status

Having this information ready speeds up the application process significantly.

Start Small

Consider beginning with spot factoring or a small credit line. This lets you test how factoring works for your business without major commitments.

You can always increase your facility or switch to whole turnover factoring later. Starting small reduces risk while you learn the system.

Frequently Asked Questions About Invoice Factoring

How quickly can I get money from invoice factoring?

Most factoring companies provide funds within 24 hours of approving your invoice. Some can even transfer money on the same day. This speed makes factoring ideal for urgent cash flow needs.

The approval process is usually faster than traditional loans. Factoring companies focus on your customer's creditworthiness rather than your business credit score.

What percentage of my invoice value will I receive upfront?

Typically, you'll receive 70-90% of your invoice value immediately. The exact percentage depends on several factors:

• Your customer's credit rating and payment history
• Your industry type and associated risks
• The age and size of your business
• The payment terms on your invoices

Established businesses with high-quality customers often get advance rates of 85-90%.

Do my customers know I'm using invoice factoring?

This depends on the type of factoring you choose. With traditional factoring, your customers pay the factoring company directly. They'll know you're using the service.

With invoice discounting, the arrangement stays confidential. You continue collecting payments from customers yourself. The factoring company remains invisible to your clients.

What happens if my customer doesn't pay the invoice?

The answer depends on whether you have recourse or non-recourse factoring:

Recourse factoring: You must buy back any unpaid invoices after an agreed period (usually 90-120 days). You keep the credit risk.

Non-recourse factoring: The factoring company takes the loss if customers don't pay. This protection costs more but gives you peace of mind.

How much does invoice factoring cost?

Factoring fees typically range from 1-5% of your invoice value. The exact cost depends on:

• Your business size and track record
• Customer credit quality and payment terms
• Invoice volumes and frequency
• Type of factoring arrangement chosen

Monthly fees may also apply, usually 1-3% per month until your customer pays. Always ask for a complete fee breakdown before signing up.

Can I factor invoices from any customer?

Most factoring companies prefer invoices from creditworthy business customers. They typically won't factor:

• Consumer invoices (B2C sales)
• Invoices from customers with poor credit ratings
• Disputed or overdue invoices
• Invoices with very short payment terms (under 30 days)

The factoring company will usually run credit checks on your customers before approving their invoices.

What's the minimum invoice value for factoring?

Most factoring companies set minimum invoice values between £500 and £1,000. Some specialist providers will factor smaller invoices, but fees may be higher.

There's usually no maximum limit, though very large invoices may require additional credit checks or approval processes.

How long are factoring contracts?

Contract lengths vary widely:

• Spot factoring: No long-term commitment - factor individual invoices as needed
• Flexible agreements: 3-6 month terms with rolling renewals
• Standard contracts: 12-24 months with early termination penalties
• Long-term deals: 2-3 years, often with better rates

Shorter contracts offer more flexibility but may cost more. Longer agreements typically provide better rates and terms.

Will factoring affect my credit rating?

Invoice factoring doesn't appear as debt on your balance sheet, so it shouldn't directly harm your credit rating. However:

• Some factoring companies may run credit checks when you apply
• Poor management of your factoring facility could indirectly affect your creditworthiness
• Late payments to the factoring company could impact your business credit score

Always maintain good relationships with your factoring provider to protect your credit standing.

Can I still offer early payment discounts to customers?

Yes, but you'll need to discuss this with your factoring company first. Early payment discounts reduce the amount they collect, which affects their fees and your advance rate.

Some factoring companies will adjust their terms to accommodate discount policies. Others may prefer you avoid offering discounts to factored invoices.

What industries work best with invoice factoring?

Factoring works well for most B2B industries, particularly:

• Professional services (consultants, agencies, solicitors)
• Manufacturing and distribution companies
• Construction and building trades
• Recruitment agencies and staffing firms
• Import/export businesses

Service-based businesses often find factoring especially beneficial due to longer payment terms and reliable customer bases.

How do I switch from one factoring company to another?

Switching factoring providers involves several steps:

1. Review your current contract for termination clauses and penalties
2. Ensure all outstanding advances are settled
3. Notify your current provider in writing (usually 30-90 days' notice required)
4. Set up your new factoring facility before terminating the old one
5. Inform customers of the change in payment details

Good planning ensures no disruption to your cash flow during the transition.

Expert Tips for Success

Maximising Your Factoring Benefits

1. Maintain Strong Customer Relationships

• Continue excellent customer service despite payment changes
• Respond quickly to customer queries about new payment processes
• Keep customers informed about any changes or issues
• Regular customer credit reviews to maintain good advance rates

2. Optimise Your Invoice Management

• Submit invoices to the factoring company immediately after issuing them.
• Ensure all invoice details are accurate and complete
• Maintain clear documentation for any disputed amounts
• Regular reconciliation of factored versus paid invoices

3. Strategic Use of Factoring

• Factor high-value, reliable customer invoices first
• Use improved cash flow to negotiate better supplier terms
• Invest freed-up capital in growth opportunities
• Consider seasonal variations in factoring needs

Red Flags: When Factoring Might Not Work

Business Characteristics:

• Mainly cash sales or very short payment terms
• High dispute rates or frequent invoice corrections
• Customers with poor credit ratings
• Very small invoice values (under £500)

Financial Situations:

• Profit margins are too thin to absorb factoring costs
• Existing financial difficulties or insolvency concerns
• Over-reliance on one major customer
• Rapid business decline or market changes

Technology and Digital Factoring Trends

Modern Factoring Platforms

Online Portals Features:

• Real-time invoice status tracking
• Instant advance payments via bank transfer
• Automated credit checks and approvals
• Mobile apps for on-the-go management
• Integration with accounting software (Xero, QuickBooks, Sage)

Artificial Intelligence Applications:

• Automated credit scoring of customers
• Predictive analytics for payment timing
• Fraud detection and prevention
• Dynamic pricing based on risk assessment

Future of Invoice Factoring

Emerging Trends:

• Blockchain technology for transparent transactions
• Open banking integration for faster processing
• AI-powered risk assessment and pricing
• Embedded finance within accounting software

Market Predictions:

• Continued growth in SME factoring adoption
• Increased competition is driving down costs
• More flexible, on-demand factoring options
• Enhanced regulatory oversight and consumer protection

Resources and Further Reading

Professional Organizations

• Asset Based Finance Association (ABFA): Trade body for UK factoring companies now UK Finance 
• British Business Bank: Government-backed finance information
• Institute of Credit Management: Credit control and debt recovery guidance
• Federation of Small Businesses: SME financial guidance and support

Regulatory Bodies

• Financial Conduct Authority (FCA): Regulatory oversight and consumer protection
• Financial Ombudsman Service: Complaint resolution for financial services
• Information Commissioner's Office (ICO): Data protection compliance

Useful Tools and Calculators

• ABFA factoring cost calculator
• Credit reference agency reports (Experian, Equifax, Creditsafe)
• Cash flow forecasting templates
• Invoice factoring comparison websites

Government Support Schemes

• British Business Bank programs: Alternative finance information
• HMRC Time to Pay arrangements: Payment deferrals if needed
• Local authority business support: Regional factoring provider directories
• Growth hubs: Business finance advice and guidance

Contact Information and Next Steps

If you're considering invoice factoring for your UK business:

1. Assess your situation using the criteria outlined in this guide
2. Calculate potential costs using the examples and formulas provided
3. Research providers from the lists and recommendations above
4. Seek professional advice from accountants or business advisors
5. Start with a small facility to test how factoring works for your business

Remember that factoring is just one tool in your financial toolkit. The best approach combines factoring with strong credit control, efficient operations, and strategic business planning.

Conclusion

Invoice factoring offers a practical solution to cash flow problems. It turns your unpaid invoices into immediate working capital. This improvement helps you grow your business faster and more confidently.

The key is choosing the right factoring company and terms for your situation. Take time to compare options and understand all costs involved.

Remember that factoring is a business tool, not a magic solution. It works best as part of a broader financial strategy. Use it wisely to support sustainable business growth and improved cash flow management.