The Department for Business and Trade estimated in July 2025 that late payment costs the UK economy almost £11bn a year and contributes to 38 business closures a day. Invoice factoring tackles both halves of that problem: it pays you early, and it puts a professional collections team behind every invoice.
What is invoice factoring?
Invoice factoring is a facility under which a business assigns its unpaid business-to-business invoices to a finance provider in return for an immediate advance, typically 70% to 90% of each invoice. The provider then manages the sales ledger and collects payment from customers, releasing the remaining balance less its fees once each invoice is paid.
What distinguishes factoring from the other products in the invoice finance family is the service element. You are not only borrowing against your debtors; you are outsourcing credit control. That is why it is usually disclosed to customers, why its service fee is higher than invoice discounting, and why it tends to suit smaller and growing businesses that do not have a finance team. In accountancy and business studies the same product is called debt factoring.
How invoice factoring works
Review and agreement
The provider assesses your sales ledger, customer concentration, invoicing practice and sector, then proposes an advance rate, fees, facility limit and any excluded customers. You sign a factoring agreement and a debenture is usually registered.
Notice of assignment
Your customers are written to, and your invoice template is updated, so that payment is directed to the provider. From this point each new invoice is uploaded to the provider's portal.
Verification and advance
The provider checks a sample or all of the invoices, sometimes by confirming delivery with your customer, then pays the agreed percentage into your account.
Collection and settlement
The provider's credit controllers manage the ledger. When your customer pays, the balance is released to you after fees. Invoices unpaid beyond the recourse period are recharged to you unless the facility is non-recourse.
What the credit control service actually does
Sales literature tends to say "we take care of collections". In practice a factoring provider's credit control team carries out a defined set of tasks on your behalf:
- Monthly statements
Each customer receives a statement of open invoices, usually monthly, listing what is due and when.
- Reminder letters and emails
Scheduled reminders go out before and after the due date, following an agreed collections timetable that you can usually review.
- Telephone collections
Overdue accounts are called by a named credit controller, who logs promises to pay, queries and disputes and reports them back to you.
- Cash allocation and reconciliation
Incoming payments are matched to invoices, short payments and credit notes are flagged, and your online ledger is updated so you can see exactly what is outstanding.
Most providers also run credit checks on new customers and set a credit limit for each, which doubles as useful intelligence about who you are trading with. What they will not normally do is pursue legal action on a disputed invoice; disputes are passed back to you to resolve.
A disclosed facility: what your customers see
Factoring is disclosed, meaning your customers know a finance provider is involved. Three things change from their point of view.
First, they receive a notice of assignment. In plain terms this is a short letter saying that your business has assigned its debts to the provider, that payment of invoices should now be made to the provider's bank account, and that paying you directly will not discharge the debt. The legal weight of that last point is why providers insist on it: once notified, a customer who pays you instead of the factor can still be asked to pay again.
Second, your invoices carry an assignment clause, typically a sentence at the foot of the invoice repeating the instruction and giving the provider's bank details.
Third, statements, reminders and calls come from the provider's team. Some providers run collections in your trading name; others use their own. Factoring is well established in UK trade sectors and most business customers, particularly larger ones, treat it as routine. If you would prefer customers not to know, confidential invoice discounting is the alternative, though it is generally reserved for businesses with established credit control.
Who invoice factoring suits
Factoring is a strong fit for owner-managed businesses where the director is also the credit controller, for firms whose customers pay on 45 to 90-day terms, and for sectors with a built-in cash gap. Recruitment agencies paying temporary workers weekly, haulage operators with weekly fuel bills, and manufacturers buying materials months ahead of payment are the classic users. For a smaller company, outsourced collections can also mean fewer late payers: the small business guide covers how facilities are shaped at lower turnover.
Advantages and disadvantages
Advantages
- A large share of each invoice is available soon after it is raised
- Professional credit control, credit checks and customer limits included
- Available to younger and smaller businesses than discounting
- Facility scales with turnover
- Optional bad debt protection for approved customers
Disadvantages
- Higher service fee than discounting, because you are paying for the service
- Customers are notified and contacted by a third party
- Loss of direct control over how your customers are chased
- Twelve-month terms, notice periods and minimum fees are common
- Disputed or stage-billed invoices are typically unfundable
Eligibility
Every provider has its own criteria, but the common requirements are a UK-based business selling to other businesses on credit, invoices raised for completed work, creditworthy customers with no single debtor exceeding roughly 25% to 30% of the ledger, and turnover usually above £100,000 to £250,000. Limited companies and LLPs are simplest. Businesses in construction can be funded but face lower advance rates and more exclusions. Our eligibility checker goes through the full list.
What invoice factoring costs
Expect a service fee of roughly 0.75% to 3% of turnover, covering administration and credit control, and a discount charge on funds drawn, usually 1.5% to 5% a year over base rate or SONIA. Set-up fees, minimum monthly fees, audit fees and refactoring charges on invoices that pass the recourse period may be added. The costs guide explains how to compare quotations on a like-for-like basis.
Illustrative example A recruitment agency factoring £80,000 a month
- Monthly invoices assigned
- £80,000.00
- Initial advance (85%)
- £68,000.00
- Service fee (1.5% of invoices)
- £1,200.00
- Discount charge (7.5% a year on £68,000, average 45 days)
- £628.77
- Balance released as customers pay
- £10,171.23
- Total monthly cost of the facility
- £1,828.77
Figures are illustrative estimates only and do not represent a finance offer. The cost equals about 2.3% of the invoices factored; the agency receives £68,000 roughly six weeks before its clients pay. Model your own ledger in the factoring calculator.
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Invoice factoring vs invoice discounting
| Feature | Invoice factoring | Invoice discounting |
|---|---|---|
| Credit control | Provider's team chases and collects | You keep your own credit control |
| Customer awareness | Disclosed by notice of assignment | Usually confidential |
| Service fee | Higher, roughly 0.75% to 3% | Lower, roughly 0.2% to 1% |
| Typical minimum turnover | From around £100k to £250k | Often £500k or more |
| Best suited to | Smaller or growing firms without a finance team | Established firms with strong systems |
The decision usually comes down to whether you want to outsource collections or keep them. The full comparison sets out the criteria.
Frequently asked questions
How quickly can I get funds with invoice factoring?
Setting up a facility often takes one to four weeks, covering the provider's review of your ledger and customers, legal documentation and the notice of assignment to your customers. Once the facility is running, advances against newly approved invoices are often released within a day or two, though timing depends on the provider and its verification process.
Will my customers think my business is in trouble?
Factoring is widely used across UK trade sectors and most business customers, particularly larger ones, are familiar with paying a finance provider. Many providers can present their credit control in your business's name or in a neutral style. If customer perception is a serious concern, confidential invoice discounting avoids disclosure altogether.
Can I factor just one customer or one invoice?
Standard invoice factoring covers your whole sales ledger, although providers may exclude particular customers. If you only want to fund some invoices, selective invoice finance lets you choose which customers or invoices to include on an ongoing basis, and spot factoring funds a single invoice as a one-off transaction.
What is the difference between invoice factoring and invoice discounting?
Both advance money against unpaid invoices. With factoring the provider takes over credit control and your customers pay it directly, so the arrangement is disclosed. With invoice discounting you keep collecting payments yourself, usually confidentially, and pay a lower service fee. Discounting is normally offered to larger businesses with proven credit control.
Does invoice factoring work for sole traders?
Some providers fund sole traders and partnerships, but fewer than fund limited companies. Sole traders and partnerships of two or three partners count as individuals under the Consumer Credit Act 1974, so a facility structured as credit of £25,000 or less can be a regulated agreement. Many providers therefore only fund limited companies or structure facilities to stay outside that regime.
How long is an invoice factoring contract?
Twelve-month agreements with three to six months' notice are common, and some providers charge a termination fee for early exit. A growing number of products run on a rolling or 28-day basis. Always check the notice period, minimum fees and termination terms before signing.