A factoring company – sometimes called a “factor” – is a finance provider that advances a business cash against its unpaid invoices and then collects payment from the customer on the business’s behalf. Instead of waiting 30, 60 or 90 days to be paid, a business sells or assigns its invoices to an invoice factoring company and receives most of their value straight away – typically 80% to 95% in the UK, often within 24 to 48 hours. The factoring company charges a fee, generally between 1% and 5% of the invoice value, and releases the balance once the customer settles. This guide explains how invoice factoring works, what it costs in the UK, the types available, and how to choose a provider.

How does a factoring company work?

Invoice factoring follows a straightforward, repeatable process. Rather than lending against an asset, the factoring company effectively buys your unpaid invoices, which is why approval usually depends more on your customers’ creditworthiness than your own.

1. You raise an invoice as normal after delivering goods or services to a business customer, then send a copy to the factoring company.
2. The factoring company advances an agreed percentage of the invoice value – typically 80% to 95% – often within 24 to 48 hours.
3. The factoring company manages collection, chasing and receiving payment from your customer when the invoice falls due.
4. Once the customer pays in full, the factoring company releases the remaining balance to you, minus its agreed fee.

Because the arrangement is tied to invoices you have already issued, the funding available tends to grow in line with your sales.

A worked example

Take a business that issues a £10,000 invoice on 30-day terms. A factoring company might advance 90% – £9,000 – within a day or two of the invoice being raised. When the customer pays the full £10,000 a month later, the factoring company deducts its fee (say £500) and releases the remaining £500, leaving the business with £9,500 in total. In effect, the business has traded a small fee for immediate access to most of the cash it was owed, rather than waiting a month or more to be paid.

Factoring vs invoice discounting

Invoice factoring is often confused with invoice discounting. Both release cash tied up in unpaid invoices, but they differ in two important ways: who collects payment, and whether your customers know a funder is involved.

With invoice factoring, the factoring company takes over your sales ledger and credit control, chasing and collecting payment directly from your customers. This is usually “disclosed”, meaning customers are aware a third party is involved, and it tends to suit smaller businesses that want to outsource collections.

With invoice discounting, you keep control of your own credit control and continue collecting payment yourself, and the facility is typically confidential – customers need not know a funder is involved. It tends to suit larger, established businesses with their own finance teams. In short, factoring hands over collections; discounting keeps them in-house. Many UK providers offer both.

Types of factoring

Factoring is not a single product. UK providers typically offer several variations:

• Recourse factoring – the most common and lower-cost option. If your customer ultimately doesn’t pay, you repay the advance, so the factoring company doesn’t carry the bad-debt risk.
• Non-recourse factoring – the factoring company absorbs the loss if an approved customer fails to pay, usually for a higher fee. It is effectively factoring with built-in bad-debt protection.
• Spot or selective factoring – you fund a single invoice or a chosen few rather than your whole ledger, which gives flexibility if you only need occasional support.
• Whole-ledger (whole-turnover) factoring – you fund all your invoices under one facility, which usually means better rates but less selectivity.
• Disclosed vs confidential – disclosed means customers know a factor is involved; a confidential facility keeps the arrangement private.
• CHOCS (Client Handles Own Collection Services) – a middle ground where you continue to collect payments yourself even though the facility is a factoring arrangement.

What does invoice factoring cost in the UK?

Factoring costs in the UK are usually made up of two main charges. The first is a service (or administration) fee, typically around 0.5% to 2% of your annual turnover, which covers managing your sales ledger and collections. The second is a discount charge – sometimes called the factoring fee – applied to the money advanced, often quoted at 1% to 5% of the invoice value and in some cases charged for each month the invoice remains unpaid, similar to interest.

On top of these, some providers add arrangement or setup fees, minimum monthly charges, or fees for services such as same-day transfers. Because pricing depends on your turnover, sector, invoice volumes and the creditworthiness of your customers, most factoring companies quote individually rather than publishing fixed rates – so it is worth comparing the all-in cost rather than any single headline percentage.

The benefits of using a factoring company

• Faster cash flow – access most of an invoice’s value within a day or two rather than waiting for payment terms to elapse.
• Funding that grows with sales – because it is tied to invoices, available funding rises as you invoice more.
• No need for fixed-asset security – factoring is based on your receivables, not on property or equipment.
• Outsourced credit control – with factoring, the provider chases payment, freeing up your time.
• Approval based on your customers – because it hinges on your customers’ ability to pay, factoring can suit newer businesses that might struggle to secure a traditional loan.

The risks and drawbacks

• Cost – factoring can work out more expensive than a bank overdraft or loan, particularly for low-margin businesses.
• Customer relationships – with disclosed factoring, your customers deal with the factoring company directly, so it is worth considering how that fits your relationships.
• Contract terms – some facilities involve minimum terms, notice periods or minimum-fee commitments, so exiting can take planning.
• Recourse liability – under a recourse arrangement you remain liable if a customer doesn’t pay, so the funding isn’t a guarantee against bad debt unless you choose non-recourse cover.
• Suitability – factoring generally applies to business-to-business (B2B) invoices, so businesses that sell directly to consumers usually can’t use it.

Which businesses use factoring?

Factoring is most common in sectors where long payment terms and steady B2B invoicing put pressure on cash flow. In the UK that typically includes recruitment and staffing agencies (which often pay workers before clients pay them), haulage and transport, manufacturing, wholesale and distribution, construction, and printing. It tends to suit growing businesses that invoice other businesses on credit terms and need working capital to bridge the gap between doing the work and getting paid.

How to choose a factoring company in the UK

Choosing a factoring company is less about the headline advance rate and more about the overall fit. A few things are worth checking:

• The all-in cost – compare the service fee and discount charge together, plus any arrangement or minimum fees, rather than a single percentage.
• Recourse or non-recourse – decide whether you want bad-debt protection built in, and what that costs.
• Contract flexibility – check whether you can fund selectively or must commit your whole ledger, and note any minimum terms and notice periods.
• Sector experience – providers that understand your industry’s invoicing and payment patterns can fund more smoothly.
• Regulation and standards – invoice factoring is not a regulated activity in the UK, so providers aren’t overseen by the Financial Conduct Authority in the way banks are. It is worth checking whether a provider is a member of UK Finance and follows its standards framework for invoice finance, which acts as the sector’s main code of conduct.

As with any funding decision, the right choice depends on your turnover, sector and how much control you want to keep over collections. It pays to compare what each invoice factoring company offers – on advance rate, all-in cost and contract terms – before committing to a facility.

Frequently asked questions

Is invoice factoring a loan?
No. Factoring isn’t a loan – you are selling or assigning your unpaid invoices to a factoring company in exchange for early payment, rather than borrowing against them. No debt sits on your balance sheet, and approval depends largely on your customers’ creditworthiness rather than your own.

What’s the difference between factoring and invoice discounting?
With invoice factoring, the factoring company collects payment from your customers and the arrangement is usually disclosed to them. With invoice discounting, you keep control of collections and the facility is typically confidential. Factoring suits businesses that want to outsource credit control; discounting suits those that prefer to keep it in-house.

How much does a factoring company cost in the UK?
UK factoring costs usually combine a service fee of around 0.5% to 2% of turnover with a discount charge of roughly 1% to 5% of the invoice value. Exact pricing depends on your turnover, sector, invoice volumes and customer credit quality, so most providers quote individually.

Is invoice factoring regulated in the UK?
Invoice factoring is not currently a regulated activity in the UK, so providers are not overseen by the Financial Conduct Authority in the same way as many other lenders. Many reputable providers are members of UK Finance and follow its standards framework for invoice finance, which is worth checking when comparing options.

Can a small business use a factoring company?
Yes. Factoring is often used by small and growing businesses precisely because approval is based on their customers’ ability to pay rather than their own trading history. It is typically available to any business that invoices other businesses on credit terms.

Is it right for your business?

A factoring company turns unpaid invoices into working capital, advancing most of an invoice’s value quickly and collecting payment on your behalf. It can be a practical way to smooth cash flow for B2B businesses with long payment terms, but the cost, contract terms and level of control vary from provider to provider. Understanding how factoring works, what it should cost and the type of facility you need puts you in a stronger position to compare providers and choose the right one.

This article is for general information only and does not constitute financial advice. Factoring costs and terms vary and can change over time, and every business’s circumstances differ, so speak to a qualified professional before entering into a factoring arrangement.