Invoice Factoring

Invoice factoring is a business finance product that provides both funding against unpaid invoices and a credit control service. This improves your cash flow and saves you money as you don't need to employ credit controllers or handle the task yourself.

According to our research, the pricing offered by different factoring companies varies significantly, with some quoting 2.7 times more to the same customer. Whilst using these funding products is an excellent way to improve a UK company's liquidity, you must be careful when selecting a provider.

That is why we offer a free, independent quote search for factoring. We can connect you with the leading providers of these services in the UK and provide expert support and guidance.

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Or call Sean on 03330 113622, and he will find invoice factoring quotes for you.

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What Is Invoice Factoring?

Invoice factoring information for companies needing funding and credit control

Invoice Factoring (also sometimes called accounts receivable factoring, financial factoring, or debt factoring) is a business finance product that provides funding against unpaid sales invoices, along with a managed credit control service.

  • Funding: money against your outstanding sales invoices and new invoices as you raise them, providing working capital that improves cash flow.
  • Credit control support: help to collect outstanding invoices, saving time and the cost of employing credit control staff.
  • Confidentiality: if required, credit control can be undertaken in your business name, so customers are unaware.
  • Protection against non-payment: optional bad debt protection if you want cover against customer failure.

Is Debt Factoring Different?

No. Debt factoring is another term used to describe invoice factoring in the UK. It refers to the same process of releasing cash from unpaid sales invoices, with the factoring company providing funding and managing credit control.

A Simple Explanation of Factoring

If you want the simplest explanation, factoring provides two core services, plus optional extras depending on the facility:

1) Funding

Funding (also called a prepayment) is provided against your outstanding sales invoices. This can significantly improve cash flow because you do not need to wait for customers to pay before accessing cash tied up in invoices. With many providers, funding can be made available quickly once invoices are submitted and approved.

2) Credit Control

The second core service is credit control. With invoice discounting you usually handle collections yourself. With factoring, the provider undertakes the credit control, although the depth of service varies. Some providers chase only the largest debtors, while others provide a comprehensive service chasing all outstanding invoices.

Optional Extras

Beyond the two core services, facilities can include:

  • Confidential factoring: credit control carried out in your business name (so customers are unaware).
  • Bad debt protection (non-recourse): optional protection if a customer becomes insolvent and cannot pay.
  • Export support: facilities can sometimes include overseas invoices as well as UK invoices.
  • Selective / spot factoring: where you choose which invoices to fund (often with no ongoing minimum usage commitment).
  • Add-on services: some providers can bundle extra services such as payroll support (useful in sectors like recruitment).

For a more detailed explanation of choosing the right type, see our Factoring Product Decision Tree.

Want the full detail? See our Factoring Guide for how factoring works in practice, common pitfalls, and how providers differ.

How Does Factoring Work? 

There are many different types of factored facilities, but in general, factoring of invoices works as follows:

  • The finance company (factor) provides you with a prepayment against your invoices.

  • The prepayment percentage can be up to 100% depending on circumstances.

  • A 90% prepayment against a £100K sales ledger could release £90K of funding.

  • This immediate cash injection can be used for any purpose.

  • The factor provides credit control support to save you time and money. This feature distinguishes this product from other receivables financing options.

  • Credit control activities can be undertaken in your business name.

  • When customers pay, the invoice balance (minus charges) is remitted to you.

  • As you raise new sales invoices, new invoice prepayments make more money available.

  • In this way, the funding grows as your turnover and sales ledger grow. Companies that use factoring have significantly stronger cash flow.

How factoring works (quick example)

  • Accounts receivable submission: you submit invoices to the provider (often electronically, sometimes directly from accounting software).
  • Advance payment: the provider makes a prepayment available, often within a day, once invoices are approved.
  • Collection: the provider undertakes credit control activity where required.
  • Final settlement: once the customer pays, the remaining balance (less fees) is released to you.

Worked Example: How Much Funding Is Available?

When invoices are uploaded (or synchronised) to the provider, its system calculates an availability figure, which is the amount you can draw down (subject to any reserves or limits).

Simple example:

  • Sales ledger (total eligible invoices outstanding): £100,000
  • Prepayment percentage: 85%

The funding available (before any deductions) would be:

£100,000 x 85% = £85,000

In practice, providers may deduct fees and apply any reserves or restrictions (explained below) before arriving at your final availability figure.

Reserves, Limits and Unapproved Invoices

It is normal for availability to be reduced by certain controls, which differ by provider and by deal structure. Common examples include:

  • Reserves: a defined amount withheld from availability to cover a risk factor (for example, where there is likely to be set-off/contra trading).
  • Debtor concentration limits (prime debtor restrictions): limits on how much funding is available against your largest customer(s), to avoid over-reliance on one debtor.
  • Unapproved / disapproved invoices: invoices that are too old, disputed, outside policy, or otherwise not eligible for funding, which generate zero availability.
  • Exclusions: certain invoice types (e.g., consumer invoices) may be ineligible for funding, depending on the facility.

These points matter because two quotes with the same headline prepayment percentage can still produce very different day-to-day cash availability. This is one reason why an independent comparison can be valuable.

What Happens When an Invoice Is Paid?

In simple terms, the prepayment is repaid from the customer payment, and the remaining balance (after fees) becomes available for drawdown.

Example flow (simplified):

  1. You raise an invoice for £1,000, and it is accepted for funding.
  2. At an 85% prepayment, £850 becomes available.
  3. You draw the £850, and (if applicable) a discount charge accrues on that prepayment until the invoice is paid.
  4. The customer pays £1,000 into the factoring account.
  5. £850 clears the prepayment, and the remaining £150 (minus fees) becomes available to release to you.

Practical point: with most providers, if you do not draw funds (you leave availability untouched), you generally do not incur discount charges on that portion, because the discount is usually charged on drawn funds.

Benefits of Invoice Factoring

The benefits vary depending on the product variant, but common advantages include:

  • Improved cash flow: use working capital for wages, suppliers, HMRC, or growth, without waiting for customer payment terms to end.
  • Time savings: outsource credit control rather than doing it in-house.
  • Scalable funding: as you raise more invoices, the facility can release more working capital.
  • Optional bad debt protection: reduce risk from customer insolvency (non-recourse option).
  • Confidentiality options: in some structures, customers may be unaware that the facility exists.

See our full discussion of the pros and cons of factoring here.

Recourse and Non-Recourse Factoring Explained

What Is Recourse Factoring?

Recourse factoring is the most common form of invoice factoring in the UK. It provides funding against your invoices and a credit control service, but does not include built-in protection if a customer fails to pay.

How Recourse Works in Practice

Recourse is driven by a recourse period (for example, a set number of days from invoice date or from the end of the month). If an invoice remains unpaid beyond that period, the funding against that invoice is effectively reversed. In practice, this usually reduces available funding on your sales ledger rather than requiring a direct repayment.

An Example of Recourse Factoring

If you receive an 85% prepayment on a £100 invoice, you could draw £85 immediately. If the invoice later exceeds the recourse period, that £85 would be deducted from your available funding. New invoices often offset this.

What Is Non-Recourse Factoring?

Non-recourse factoring includes protection against customer insolvency. The factoring company sets credit limits for each customer, and if you provide an invoice within those limits, you are protected if a customer fails.

Does Non-Recourse Cost More?

Yes. Non-recourse factoring includes a small additional charge, often called the credit protection element (CPE), which typically starts from about 0.45% of invoice value (+ VAT where applicable).

Not sure which option is right? We can compare recourse and non-recourse factoring quotes for you independently, just call 03330 113622.

How Much Cash Could You Raise?

The amount of money that you could raise will depend upon your industry sector and the nature of your business, typically 85% of invoice value, but up to 100% (less charges) in some sectors.

Find out how much cash you could potentially raise with our free online factoring cash calculator.

What Does Invoice Factoring Cost?

On a selective basis (where you choose invoices to fund), you only pay for the invoices you submit, so there is no minimum cost; you pay for each transaction.

Examples Of Factoring Fees

If you want to fund against all your invoices, for an entire year, factoring fees start from c. £3,500 + VAT per annum, with a single fee, inclusive arrangements are available. The cost for your business will depend upon the type of facility that you want and the nature of your business. We can find quotations for you without obligation, and our service is independent.

See these: Examples of the Cost of Factoring.

Alternatively, if you opt for the selective, single invoice finance option, where you select the invoices to be funded, you have no ongoing commitment to use the service in the future.

We do not charge you to use our quote search service. We may receive a commission from the finance company if you choose to proceed with them. However, on average, we still manage to save most customers money on quotes received from elsewhere.

Read our Factoring Guide for a deeper explanation of how factoring works in practice, provider differences, and what to watch out for.

How Long Does It Take?

The providers will be able to work at a pace that suits you. A facility can be in place within a few days, but our record is almost instant invoice factoring, which took just 7 hours from initial enquiry to the funds being in our client's bank account. If you need the funding quickly, we have providers that can deliver.

Further Resources and Information 

Below are links to further resources and information that you may find helpful:

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Examples of funders we work with:

metro bank
apollo business finance
ultimate finance group
ifg
berkeley
leumi abl