How Invoice Factoring Works
Step one: you raise an invoice and submit it to the factor. Step two: the factor advances 80-90% of the invoice value within 24 hours. Step three: the factor manages credit control, chasing payment from your customer on your behalf. Step four: your customer pays the factor directly. Step five: the factor releases the remaining balance (10-20%) minus their fees. The total cost comprises a service fee (typically 0.5-3% of invoice value per month) and a discount charge (interest on funds advanced, typically 2-8% per annum).
Factoring vs Invoice Discounting
The key difference is who manages credit control. In factoring, the factor manages collections, so your customers know the factor is involved. In invoice discounting, the business retains its own credit control function and collections remain confidential. Factoring is typically more suitable for smaller businesses or those without a dedicated credit control function. Discounting is often preferred by larger businesses who value the confidentiality.
Benefits of Invoice Factoring
Improved cash flow: cash within 24 hours of raising an invoice rather than 30-90 days. Reduced credit control burden: the factor chases payment, freeing management time. Bad debt protection: many factoring facilities include non-recourse protection, meaning you are not liable if a customer becomes insolvent. Scalable: the facility grows automatically as your invoicing volume increases.
- Improved cash flow: cash within 24 hours of raising an invoice rather than 30-90 days.
- Reduced credit control burden: the factor chases payment, freeing management time.
- Bad debt protection: many factoring facilities include non-recourse protection, meaning you are not liable if a customer becomes insolvent.
- Scalable: the facility grows automatically as your invoicing volume increases.
What Businesses Suit Factoring?
Invoice factoring works best for: B2B businesses with verifiable commercial invoices; businesses with 30-90 day customer payment terms; businesses without a dedicated credit control function; growing businesses where the working capital demand increases with revenue; and businesses with creditworthy customers even where the business itself has a challenging credit profile.
- B2B businesses with verifiable commercial invoices.
- Businesses with 30-90 day customer payment terms.
- Businesses without a dedicated credit control function.
- Growing businesses where the working capital demand increases with revenue.
- Businesses with creditworthy customers even where the business itself has a challenging credit profile.
Eligibility
Factoring typically requires: B2B invoicing only (consumer invoices are not eligible); invoices free from disputes or conditional payment clauses; minimum monthly invoicing of £25,000+ for most lenders; UK-registered business; and customers based in the UK (overseas customer factoring is available through specialist international factoring lenders).
- B2B invoicing only (consumer invoices are not eligible).
- Invoices free from disputes or conditional payment clauses.
- Minimum monthly invoicing of £25,000+ for most lenders.
- UK-registered business.
- Customers based in the UK (overseas customer factoring is available through specialist international factoring lenders).