One of the most frustrating challenges in business is delivering excellent work, raising an invoice, and then waiting weeks — or even months — for payment to arrive. For many businesses, particularly those operating in B2B sectors, long payment terms can create serious cash flow problems that hinder growth and create unnecessary stress.
Invoice factoring offers a direct solution: selling your unpaid invoices to a third-party finance provider in exchange for an immediate advance on their value. This guide explains exactly how it works, who it suits, and what to look out for.
What Is Invoice Factoring?
Invoice factoring (also called accounts receivable factoring) is a type of debtor finance where a business sells its outstanding invoices to a factoring company (called a factor) at a discount. The factor pays the business an immediate advance — usually 70% to 90% of the invoice value — and then takes responsibility for collecting payment from the customer.
Once the customer pays the invoice in full, the factor releases the remaining balance to the business, minus their fee.
How Invoice Factoring Works: Step by Step
- You raise an invoice to your customer for goods or services delivered.
- You submit the invoice to your factoring company.
- The factor advances you 70–90% of the invoice value, typically within 24–48 hours.
- The factor contacts your customer and manages the collection process.
- Once the customer pays, the factor releases the remaining balance to you, minus their service fee.
Invoice Factoring vs Invoice Discounting
| Feature | Invoice Factoring | Invoice Discounting |
| Advance rate | 70%–90% | 70%–90% |
| Collection managed by | The factoring company | Your business |
| Customer awareness | Customer knows about the factor | Typically confidential |
| Admin burden on business | Low | Higher |
| Best for | Businesses without credit control | Businesses with strong credit control |
Types of Invoice Factoring
Recourse Factoring
The most common type. If the customer fails to pay, the business must buy back the invoice or repay the advance. This places the credit risk back with the business.
Non-Recourse Factoring
The factoring company assumes the credit risk. If the customer becomes insolvent and cannot pay, the business is not required to repay the advance. Non-recourse facilities are more expensive but offer greater protection.
Spot Factoring
Rather than factoring all invoices on an ongoing basis, spot factoring allows businesses to sell individual invoices selectively. More flexible but typically more expensive per invoice.
The Cost of Invoice Factoring
Factoring fees typically consist of two components:
- Service charge: A percentage of the gross invoice value, usually 0.5% to 3%, covering the administration of collections.
- Discount fee: An interest charge on the money advanced, typically calculated daily at an annual rate of 1.5% to 4% above the Bank of England base rate.
For example, on a £50,000 invoice factored at 85% with a 2% service charge and a 30-day collection period, the immediate advance would be £42,500 and the total fee around £1,000–£1,500.
Who Is Invoice Factoring Suitable For?
- B2B businesses that issue invoices with 30, 60, or 90-day payment terms
- Companies experiencing fast growth that has outpaced working capital
- Businesses with limited access to traditional bank finance
- Seasonal businesses needing to bridge cash flow gaps
- Startups without the trading history required for standard loans
Invoice factoring is generally not suitable for businesses that sell directly to consumers, operate on a cash-on-delivery basis, or have customers with poor credit ratings.
Advantages and Disadvantages
| Advantages | Disadvantages |
| Immediate access to cash | Customers know you use a factor |
| No new debt on balance sheet | Can be more expensive than a bank loan |
| Outsources credit control | Factor controls customer relationship |
| Scales with your sales | Not suitable for consumer businesses |
| Available to startups | Recourse risk if customers do not pay |
How to Choose an Invoice Factoring Company
The factoring market includes banks, specialist lenders, and fintech platforms. When comparing providers, consider:
- Advance rate offered
- Service fee and discount rate
- Minimum volume or turnover requirements
- Contract length and exit terms
- Quality of customer service and collections process
- Whether they offer recourse or non-recourse arrangements
- Industry experience — some factors specialise in specific sectors
Frequently Asked Questions
1. Will my customers know I am using invoice factoring?
With full factoring, yes — customers typically pay the factoring company directly and may receive correspondence from them. Invoice discounting offers a confidential alternative where customers are unaware of the arrangement.
2. Does invoice factoring affect my credit score?
No. Invoice factoring is not a loan, so it does not appear as debt on your credit file. In fact, the improved cash flow can help you pay suppliers on time, which can improve your credit standing.
3. Can I factor invoices from all my customers?
The factoring company will carry out credit checks on your customers. Invoices from customers with poor credit may be excluded. Some factors also require a minimum debtor book value.
4. What happens if a customer disputes an invoice?
With recourse factoring, disputed or unpaid invoices may need to be repurchased from the factor. Non-recourse factoring offers more protection but typically does not cover disputes — only insolvency.
5. How long do factoring contracts last?
Contracts typically run for 12 to 24 months, though spot factoring is available on a per-invoice basis with no long-term commitment.
6. Is invoice factoring available to sole traders?
Yes, many factoring providers work with sole traders and small businesses, though minimum monthly invoice volumes may apply.
7. Can I stop using a factoring company mid-contract?
Most factoring agreements have minimum notice periods and early termination fees. Review exit clauses carefully before signing.
8. How is invoice factoring different from a bank loan?
Invoice factoring advances money against existing invoices you have already raised — it is not a debt. A bank loan is a separate borrowing obligation with scheduled repayments regardless of whether your customers have paid you.
Conclusion
Invoice factoring is a powerful and often underused tool for businesses struggling with the gap between raising invoices and receiving payment. By unlocking the cash tied up in your debtors’ book, you can fund payroll, take on new contracts, and grow your business without waiting weeks or months for customers to pay. The key is to choose a reputable provider, understand the full cost of the facility, and ensure the arrangement complements rather than complicates your customer relationships.