What is invoice factoring?

Invoice factoring is a way of releasing the cash tied up in your unpaid invoices, rather than waiting 30, 60, or even 90 days for your customers to pay.

In this guide, you'll learn how invoice factoring works, the different types available, the potential benefits and risks, and how to decide whether it could be suitable for your business.

What is invoice factoring?

Invoice factoring allows your business to access a large proportion of the value of your outstanding invoices - typically between 70% and 90% - shortly after you issue them to your customers.

The finance provider advances you the cash and then collects payment from your customers when the invoices are due. Once your customer pays, you receive the remaining balance minus the provider's fees.

It's a form of funding that's directly linked to your sales, which means it could grow with your business as your turnover increases.

How does it work?

You raise an invoice as normal and send a copy to the finance provider. The provider typically advances you up to 90% of the invoice value within 24 hours.

When your customer pays, the provider deducts their fees and releases the remaining balance to you. The fees are usually charged as a percentage of the invoice value, plus a service charge.

What types of invoice factoring are there?

Invoice factoring

With factoring, the finance provider takes over the collection of your invoices. Your customers will know that a third party is involved. This could save you time on credit control but may not suit every business relationship.

Invoice discounting

With discounting, you continue to manage your own sales ledger and collect payments from customers yourself. Your customers may not be aware of the arrangement. This option tends to be available to more established businesses with robust credit control processes.

Selective invoice finance

Rather than financing your entire sales ledger, selective invoice finance allows you to choose specific invoices to fund. This could give you more control and flexibility, and may suit businesses that don't need ongoing facilities.

What are the benefits?

• Improved cash flow - access cash within days rather than waiting weeks or months for customers to pay.
• Grows with your business - the more you invoice, the more funding you could access.
• No property security required - your invoices act as the security.
• Credit control support - factoring providers may handle chasing payments on your behalf.
• Flexibility - selective products allow you to fund only the invoices you choose.

What are the risks?

• Cost - fees and charges can add up, particularly if your customers are slow to pay.
• Customer relationships - with factoring, customers will know a third party is collecting their debts.
• Dependence - relying on invoice factoring for working capital could mask underlying cash flow problems.
• Minimum commitments - some providers require you to finance all or most of your invoices.
• Customer creditworthiness - the provider may not advance funds against invoices to customers they consider high-risk.

Is my business eligible?

Invoice factoring is typically available to businesses that sell goods or services to other businesses (B2B) on credit terms. Providers will usually look at the quality of your customer base, the value and frequency of your invoices, and your industry.

It may not be suitable for businesses that primarily sell to consumers, have very small invoice values, or operate on cash-on-delivery terms.

How does it differ from other funding?

Unlike a business loan, invoice factoring doesn't create a fixed debt - it's directly linked to your invoicing activity.

Compared to a merchant cash advance, which is linked to card sales, invoice factoring is based on your B2B invoices.

Asset finance funds specific equipment purchases, whereas invoice factoring provides flexible working capital.

How do I choose a provider?

Want a quick estimate before comparing providers? Try our invoice finance calculator to see your potential advance and costs.

• Compare the total cost, including service charges, discount rates, and any hidden fees.
• Check whether you'll be tied into a minimum contract period.
• Understand what happens if a customer doesn't pay - will you bear the loss or does the provider offer bad debt protection?
• Ask whether you can choose which invoices to finance.
• Look for a provider regulated by the FCA where applicable.

How can I learn more?

The British Business Bank and GOV.UK both provide useful resources on invoice factoring.

You may also find our guides on business loans, working capital, and merchant cash advances helpful.