Invoice Factoring Explained: How It Works, What It Costs

Invoice factoring is one of the most straightforward ways for a UK business to solve a cash flow problem caused by late-paying customers. You complete work, raise an invoice, and instead of waiting 60 or 90 days, a factoring company advances you most of the money within 24 hours. Then they handle chasing your customer for payment — so you don't have to.

That last part is what separates factoring from invoice discounting. With discounting, you still manage your own collections. With factoring, the provider takes that job off your plate entirely.

What is invoice factoring?

Invoice factoring is a type of invoice finance where you sell your unpaid invoices to a specialist provider. In exchange, they advance you a large percentage of the invoice value immediately — typically 75–85% — and then collect the full amount from your customer when it falls due. Once your customer pays, the provider releases the remaining balance to you, minus their fees.

Unlike a business loan, you're not taking on debt. You're simply accessing money you've already earned, earlier than your payment terms would normally allow.

How invoice factoring works, step by step

1. You complete work and raise an invoice — say, £20,000 on 60-day terms.
2. You submit the invoice to your factoring provider — usually through an online portal. Takes a few minutes.
3. The provider advances 75–85% within 24 hours — so £15,000–£17,000 lands in your account the next working day.
4. The provider notifies your customer — they send a "notice of assignment" letting your customer know that the invoice has been transferred and they should now pay the factoring company directly.
5. The provider manages collections — they send reminders, follow up on overdue invoices, and chase payment on your behalf. You don't have to make a single awkward phone call.
6. Your customer pays the provider — in 60 days (or whenever they get around to it).
7. You receive the balance, minus fees — the remaining 15–25%, less the provider's service fee and discount charge.

What your customers see

This is the question most business owners ask first, usually with some anxiety. The honest answer: your customers will know.

When you start factoring, a notice of assignment is sent to each customer. This tells them that your invoices have been assigned to a finance provider and they should direct all payments to that provider's bank account — not yours. Future invoices will also show the provider's payment details.

In practice, most established B2B customers — especially in construction, recruitment, and manufacturing — have dealt with factoring before. It's common enough that it rarely causes issues or raises eyebrows. That said, if keeping the arrangement private matters to you, look at invoice discounting instead — it works the same way behind the scenes, but your customers never know it's happening.

What does invoice factoring cost?

Invoice factoring has two main cost components. Both vary depending on your sector, turnover, and customer payment behaviour.

1. Service fee (also called the factoring fee)

This is a percentage of your annual turnover, charged to cover administration and the credit control service. Typical range: 0.75–3% of turnover per year. It's charged monthly based on your invoice volume.

What pushes the fee higher: riskier sectors (construction vs professional services), smaller turnover (less volume to spread costs), customers with poor payment history, high dispute rates on invoices.

2. Discount charge (also called the finance charge)

This is interest on the cash advanced to you, calculated daily from the date you receive funds until your customer pays. Expressed as a rate over the Bank of England base rate — typically base rate + 2–5%. With base rate currently at 4.5%, that puts the discount charge at roughly 6.5–9.5% annualised.

The sooner your customers pay, the less you pay in discount charges. A customer who pays in 30 days costs you less than one who takes 90.

Pros and cons of invoice factoring

Worked example: construction subcontractor

Who qualifies for invoice factoring?

Factoring is available to most UK businesses that invoice other businesses on credit terms. Providers typically look for:

• B2B invoicing — you invoice businesses, not consumers
• 30–90 day payment terms — standard credit terms on your invoices
• Creditworthy customers — established businesses that are likely to pay
• £100,000+ annual turnover — some providers go lower, but rates improve above £250k
• 12+ months trading history — most providers want to see a track record
• Clean invoicing — no large number of disputed or contra invoices

Construction companies, recruitment agencies, haulage operators, and manufacturers make up the majority of factoring users in the UK — these are all sectors where payment terms are long and cash flow gaps are large. But factoring is available to most B2B businesses, including wholesalers, printers, IT contractors, and many others.

Frequently asked questions