Invoice factoring: funding with the chasing handled.
Factoring combines an advance against your unpaid invoices with a collections service run by the provider. For businesses that would rather not manage credit control in-house, it can free up both cash and time.
- Credit control
- Usually managed by the provider
- Customer awareness
- Typically disclosed
- Often suits
- Smaller or growing firms, lean back offices
- Common add-on
- Bad debt protection
What invoice factoring is
With a factoring facility, you assign your invoices to the finance provider. They advance an agreed proportion of the value to you, then take responsibility for collecting payment from your customer when the invoice falls due. Once payment is received, the balance is passed to you less their fees.
Because the provider is dealing directly with your customers, factoring is normally a disclosed arrangement: your customers will be aware that payment should be made to the provider. For many businesses that is entirely acceptable, and a professionally run collections process can improve payment behaviour.
Factoring is often the first form of invoice finance a growing business encounters, partly because providers may be more comfortable offering it where in-house credit control is limited.
How invoice factoring works
- 01
Invoice your customer
You raise the invoice as normal, with a notice that payment is to be made to the finance provider.
- 02
Receive an advance
The provider makes an agreed proportion of the invoice value available to you.
- 03
The provider collects
Their credit control team follows up with your customer and collects payment when due.
- 04
Balance released
Once your customer has paid, the remaining value is released to you, less the service fee and discount charge.
The precise mechanics, timings and documentation vary between providers. This is the general shape of the arrangement.
Businesses it often suits
- Businesses without the time or staff to run credit control
- Companies whose customers routinely pay late
- Owner-managed firms that want to focus on operations rather than chasing
- Businesses whose own credit control has become a barrier to funding
- Sectors such as recruitment, manufacturing, haulage and wholesale
A note on suitability
Suitability depends on your customers, your invoicing and the provider’s appetite. A short conversation is usually enough to tell whether this structure is worth pursuing, or whether another form of invoice finance would serve you better.
Is invoice finance suitable for my business?Where it helps, and what to weigh up
No facility is right for every business. These are the points that most often decide the matter.
Advantages
Cash flow and credit control in one
You get access to funds against your invoices and a professional collections process, without building an in-house function.
May improve customer payment behaviour
A structured, consistent follow-up process from the provider can shorten the time customers take to pay.
Optional bad debt protection
Many providers can add non-recourse cover, protecting you against a customer's insolvency within agreed limits.
Accessible for growing businesses
Because the provider controls collections, factoring can be available to businesses that might not yet qualify for confidential discounting.
Considerations
Your customers will usually know
Disclosure is normal in factoring. Most business customers are familiar with the arrangement, but if confidentiality matters to you, invoice discounting may be worth exploring instead.
Someone else speaks to your customers
The provider's collections team represents your business. It is worth understanding how they operate and what discretion you retain over sensitive accounts.
Fees reflect the extra service
Because the provider is doing more, the service fee is generally higher than for discounting. Whether that represents good value depends on what running credit control would otherwise cost you.
Factoring compared with invoice discounting
Both release cash against unpaid invoices. The difference is who runs credit control, whether your customers know, and what that means for cost and control.
Invoice factoring
Funding plus collections
- Who collects payment
- The provider's credit control team
- Customer awareness
- Usually disclosed
- Control of customer relationships
- Shared with the provider
- Demands on your systems
- Lower
- Service fee
- Generally higher, reflecting the collections service
- Often suits
- Smaller or growing firms, lean back offices
Invoice discounting
Funding, you keep control
- Who collects payment
- Your own team
- Customer awareness
- Often confidential, subject to provider criteria
- Control of customer relationships
- Retained by your business
- Demands on your systems
- Higher: accurate ledger and reporting expected
- Service fee
- Generally lower
- Often suits
- Established firms with strong processes
Not sure which is appropriate?
Most businesses know within one conversation. Some move from one to the other as they grow.
Invoice Factoring questions
Answers to the questions we are most often asked about this type of facility.
With recourse factoring, if a customer fails to pay you remain responsible for the debt. With non-recourse factoring, the provider takes on the risk of customer insolvency within agreed limits, usually for an additional fee. Which is appropriate depends on your debtor book and your appetite for risk.
Not usually. Established providers run collections in a professional manner and factoring is a widely understood arrangement in UK business. That said, it is reasonable to ask how a provider handles collections and what say you have over particular accounts before you commit.
A traditional whole-ledger facility covers all of your eligible invoices. If you only want to fund particular invoices or customers, a selective facility may suit you better.
Disputed invoices are typically excluded from funding until the dispute is resolved. Providers will usually work with you to resolve queries, but clear invoicing and good records reduce the chance of disputes arising.
- The umbrella term
Invoice Finance
A way for businesses that sell on credit terms to access a proportion of the value of unpaid invoices before customers pay.
Learn more - Funding, you keep control
Invoice Discounting
Draw funds against your sales ledger while continuing to run your own credit control, often without customers being aware.
Learn more - Fund what you choose
Selective Invoice Finance
Finance individual invoices or specific customers as the need arises, rather than committing your whole sales ledger.
Learn more
Could invoice factoring work for your business?
Tell us about your customers, your invoicing and where the pressure sits. We will tell you whether this structure fits, and what the alternatives are.
No obligation. We will tell you plainly if invoice finance does not look like the right answer.