Invoice factoring UK

What is invoice factoring?

Invoice factoring (also known as accounts receivable factoring and debt factoring) is a type of invoice finance that lets you access the cash tied up in your unpaid invoices. Instead of waiting 30 days or more for payment, you can release the cash almost immediately to improve your cash flow position and stabilise your revenue. 

You could use the funding for a variety of business purposes, such as paying wages, buying materials, repaying business finance or meeting short-term expenses.

How does invoice factoring work?

Invoice factoring is when you sell control of your accounts receivable either partially or in full. After you’ve provided your customers with products or services, the invoice factoring process usually involves the following steps:

Step 1: You issue an invoice to your customers and effectively “sell” these raised invoices to the invoice factoring company.

Step 2: The invoice factoring company verifies the invoices and pays you the majority (up to 90%) of the value of the invoices immediately. 

Step 3: Your customers pay into a bank account that is controlled by the factoring company, so they will be aware that you are using factoring. The factoring company will chase any late invoice payments. 

Step 4: Once the factoring company has been paid in full it will pay you the remaining balance, minus a fee.

Recourse vs non recourse factoring

Invoice factoring is based on the money owed to your business – but what happens if a customer doesn’t pay?

With a recourse invoice factoring facility, you are responsible for absorbing the cost of any unpaid invoices. However, if opting for a non-recourse facility, the lender would absorb the cost, leaving your business cashflow unscathed. 

For this reason, lenders often call non-recourse ‘bad debt protection’, because your business is protected from the issue of non-payment. As you might expect, this makes the factoring facility more expensive overall because the lender is accepting a higher level of risk.

Choosing between recourse and non-recourse depends, to a large extent, on the relationships you have with customers and how likely you think a non-payment is. 

Of course, factoring includes credit control – so you’ll have experienced credit controllers working on your behalf to minimise this possibility – but it’s worth considering whether the risk of a recourse facility is worth the lower cost.

Invoice factoring costs

Each factoring company has its own system for working out costs. The size of your business, the industry in which you operate and your customers’ creditworthiness can have an impact on the terms a factoring company presents you with. 

While some factoring companies have a flat fee, the majority of factoring costs hinge on the discount/factor rate and the factoring period length.

Discount/factor rates are calculated as a percentage of the invoice value, and usually range between 1.5 to 5%. The higher the number and value of the invoices, the lower the discount rate is likely to be. Generally, the longer the time your customers take to pay, the higher the charges. 

Additional fees you may have to pay could include:

• Credit check fees

• Origination fees

• Service fees

• Collection fees

• Overdue fees

• Unused line fees

• Termination fees

Invoice factoring may in fact reduce your overheads. You could end up saving more than you pay in fees because you might not need to spend as much on credit control staff. It can also enable your accounts team to focus on more value-added work. 

Invoice factoring vs discounting

Invoice discounting is another form of invoice finance. It is similar to factoring, however there is one key difference: unlike invoice factoring, invoice discounting doesn’t include credit control services, so you’d have to chase payments yourself. 

What are the advantages and disadvantages of invoice factoring?

Some of the main benefits of invoice factoring include:

• Easy to apply - less paperwork than a traditional business loan

• Quick working capital boost - funds are usually released within 24 hours

• Scalable - finance grows in line with your debtor book 

• Time saving - the factoring company chases late payments for you

• International - you may also be able to use factoring for overseas debt 

Some of the potential drawbacks of invoice factoring include:

• Your customers will know that you are using the facility

• Your customers may prefer to deal directly with you

• Your profit margin with be reduced (usually by between 1–2%)

• The factoring company will need to assess your customers’ creditworthiness. 

Is invoice factoring right for your business?

Invoice finance, including factoring, is designed for businesses that sell to other businesses (B2B) and have a turnover of more than £50,000 per year. 

You may want to explore invoice factoring if your business is experiencing cash flow problems caused by seasonal peaks and troughs, high production costs, clients who are slow to pay, or a period of unexpected growth.    

Factoring is just one type of invoice finance. There’s invoice discounting, where you remain in charge of your credit control, and selective invoice finance, where you can choose which customers or invoices to finance.

One of the main things to consider about any form of business finance is risk. 

From the lender’s perspective, invoice factoring is lower-risk because it has more control over ensuring your customers pay on time. Factoring is often what lenders favour for companies with lower turnover, a short trading history, or any other challenging circumstances.

Invoice factoring companies

There are lots of factoring companies (also known as ‘factors’) to choose from. 

Aside from the major banks, who can have strict eligibility criteria, there are as many as 100 factoring companies in the UK – from smaller local providers to large factoring companies with thousands of customers around the country.

Invoice factoring providers include:

• High street banks – some only offer factoring to their customers

• Challenger banks – mainly serving small and medium sized businesses

• Niche sector specialists – firms that lend to businesses in a specific sector

• Small local providers – usually offering a bespoke personal service

What to look for in a factoring company:

• Service – does the company have genuine reviews and testimonials? 

• Price – how much are the fees? 

• Flexibility – can you easily leave the facility if the service is poor?

Are factoring companies regulated?

Generally, factoring is unregulated. This means you won’t get the protections we’re all used to as consumers of financial products. 

However, the UK Finance (UKF) is a voluntary trade association for factoring companies which has a code of conduct for its members, including access to an independent Ombudsman for unhappy customers.

How to apply for invoice factoring

To evaluate your eligibility, the factoring company will require you to provide some documents. These could include financial statements, bank statements, a list of outstanding invoices, customer details, and any relevant contracts or agreements. 

You can use Funding Options to compare invoice factoring products and find the best finance solutions on the market. Start by telling us how much you need to borrow, what the finance is for and how quickly you need it. We’ll compare over 120 lenders to match you with the right business finance options for your needs.