• 23 Sep

    Factoring Guide How Factoring Works in Practice

    Factoring Guide, How Factoring Works in Practice

    This is our free factoring guide for businesses that want a deeper understanding of how factoring works in practice, what can go wrong, and what to look out for when choosing a provider.

    Looking for invoice factoring quotes or a product overview? For options, typical costs, and an independent quote comparison, see our main Invoice Factoring page.

    Free factoring guide explaining how factoring works and what to watch out for.

    What this guide covers

    Definition

    There are definitions of invoice factoring online, but many of them have their limitations. In the UK, we tend to define factoring slightly differently than in some other countries. This is our own definition:

    "Factoring is a financial service for businesses that provides both prepayments against unpaid sales invoices raised to other businesses, and a credit control service."

    Factoring sits within a wider family of products often referred to as invoice finance or receivables financing. The key distinguishing feature is that factoring includes a credit control service, whereas invoice discounting usually leaves collections with the business.

    A short video explanation

    See our 30-second video explanation of factoring below:

    How factoring operates day-to-day

    This section focuses on what actually happens once a facility is in place. If you are looking for the product overview, costs and quote comparison, use our Invoice Factoring page.

    1) Submitting invoices

    In most cases, invoices are submitted electronically (sometimes via an integration with your accounting software, sometimes via upload). The provider reviews invoices and applies its rules around eligibility (for example, whether invoices are too old or outside policy).

    2) Drawing funds

    Once invoices are processed and eligible, the provider calculates an availability figure. You can choose to draw funds (often via an online portal). Discount charges (similar to interest) are typically charged on drawn funds rather than on unused availability.

    3) Credit control and collections

    The provider undertakes credit control activity, which can range from chasing only the largest debtors to fully managing collections across the whole ledger. If the facility is confidential, credit control may be undertaken in your business name so that customers are unaware.

    4) Settlement when customers pay

    When customers pay, the provider allocates the payment, clears the prepayment, deducts fees, and then releases any remaining balance to you.

    How providers differ (and why it matters)

    Factoring is not a single standardised product. Providers differ in areas that can have a major effect on day-to-day cash flow and how the facility feels to run.

    • Service levels: how proactive credit control is, how issues are handled, and how accessible the team is.
    • Rules around eligibility: how quickly invoices become disapproved, and what is excluded.
    • Debtor controls: how credit limits and debtor concentration limits are set and monitored.
    • Contract terms: notice periods, minimum fees (if any), and how disputes are treated.
    • Sector experience: some funders specialise in certain trades (construction, recruitment, transport, manufacturing, and so on).

    If you want to compare providers by quote and suitability, the quickest route is our independent quote search or call 03330 113622.

    Key product variations

    There are many product variations. The detail is covered in our article: Types Of Factoring. Common variations include:

    • Whole ledger vs selective: fund all eligible invoices (whole ledger) or fund specific invoices only (selective / spot).
    • Disclosed vs confidential: customers are told to pay the provider (disclosed) or collections are undertaken in your business name (confidential).
    • Domestic vs export: UK-only invoices or UK plus overseas invoices, depending on the provider.
    • With or without protection: recourse or with optional bad debt protection (non-recourse).
    • Service-only options: in some cases, businesses only want credit control support without funding.

    Related content: Invoice Factoring for Small Business Users.

    Typical qualification criteria

    The qualification criteria for factoring can be broad. In general, if you are a business raising invoices to other businesses on credit terms, you can often find a suitable facility.

    Some providers can assist businesses with creditor pressure or arrears (for example, HMRC liabilities), because funding is linked to the strength of the debtor book as well as the structure of the facility. However, criteria varies between providers, and some take a more cautious view than others.

    Funding controls that reduce availability

    One of the most common surprises for new users is that "headline prepayment" does not always equal day-to-day availability. Availability can be reduced by controls such as:

    • Debtor credit limits: funding only applies where invoices sit within approved limits for each customer.
    • Debtor concentration (prime debtor restrictions): limits to prevent too much funding against a single large customer.
    • Ageing rules: invoices may become ineligible if they exceed a certain age.
    • Disputes and dilution: disputes, credits, short payments, contra/set-off risk, and similar factors can reduce availability.
    • Exclusions: some invoice types may not be eligible depending on the facility.

    This is why comparing providers is not only about rates. The rules can have just as much impact on usable cash flow.

    You can estimate potential working capital here: Factoring Cash Calculator.

    How pricing is structured (without quoting ranges)

    To avoid cannibalising our main product page, we do not publish broad rate ranges here. Instead, this section explains the usual structure of pricing.

    Most factoring facilities have two main costs:

    • Service fee: covers the factoring service and credit control element (often linked to turnover or a minimum monthly fee, depending on structure).
    • Discount charge: similar to interest, usually charged on the funds you draw.

    There may also be additional charges (for example, for certain payment methods or additional services), depending on the provider.

    For examples and a proper comparison, see our factoring costs and pricing information and/or request an independent quote search.

    Implementation checklist and timescales

    Implementation speed depends on the provider, your accounting setup, and how quickly information is supplied. In general, a facility can be implemented within days in many cases.

    Typical steps include:

    • Agree on facility structure and key terms.
    • Complete due diligence and onboarding checks.
    • Set up invoice submission method (integration or upload).
    • Confirm debtor rules (limits, concentration controls, exclusions).
    • Go live, submit invoices, and draw funds as required.

    Termination and switching providers

    There may be a point at which either you or your provider decides to terminate the facility. This can be for a variety of reasons and may or may not be subject to a notice period. The process is governed by the facility agreement.

    For detailed guidance on the practicalities, see our guide to invoice finance termination.

    It is also common for businesses to switch providers to achieve cost savings, raise more funding, or change the product structure. There are processes that normally allow a managed transfer between providers.

    Complaints and escalation

    Some providers are members of industry bodies and subject to codes of conduct, but not all providers are members. If you have an issue with your provider, we have practical guidance on our website about how to deal with complaints about invoice finance.

    Useful next steps

    If you need help choosing the right structure or provider, call Sean on 03330 113622.

    By Glenn Blackman

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Examples of funders we work with:

giant finance
kriya
acg
pulse cashflow finance
ifg
time finance