✅ How does invoice factoring work in the UK?
You raise a B2B invoice as normal, submit it to the factoring provider, and 80–90% of its value lands within 24–48 hours; the provider manages collection and forwards the balance, minus fees, when your customer pays. The cost is two charges: a service fee of 0.5%–3% of turnover (it includes credit control) and a discount charge of 2%–4% over base on the funds advanced. The types matter: recourse (you carry the bad-debt risk, cheaper), non-recourse (the provider absorbs insolvency losses, dearer) and selective (factor single invoices, not your whole ledger). It’s the sale of an asset, not debt on your balance sheet. Money Pilot compares 50+ providers’ territory across 200+ lenders at zero broker fees — FCA regulated (FRN: 968705).
Invoice factoring isn’t one single, fixed product, there are genuine variations depending on how much risk you want to carry and how much of your ledger you actually want to fund. Let’s go through the mechanics properly, then the cost, then the specific types worth knowing about before you compare providers.
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What is invoice factoring?
Invoice factoring converts unpaid B2B invoices into an upfront cash advance, typically 80- 90% of the invoice value, released within 24-48 hours. The factoring provider takes over your credit control, meaning they collect payment directly from your customers, which is why factoring is described as “disclosed”, your customers know a third party is involved. Once the customer pays in full, the provider releases the remaining balance, minus their fees.
How does the process actually work, step by step?
- You deliver goods or services and raise an invoice, as normal
- You submit that invoice to the factoring provider
- The provider verifies the invoice and assesses your customer’s creditworthiness
- Funds, typically 80-90% of the invoice value, land in your account, often within 24-48 hours
- The provider manages collection, chasing payment from your customer according to the agreed terms
- Once your customer pays in full, the provider forwards the remaining balance, minus their fees
What does invoice factoring actually cost?
Two charges combine to form the total cost:
Service fee: covers administration and credit control, typically 0.5-3% of turnover, depending on volume, sector, and your customer base’s risk profile
Discount charge: effectively interest on the funds advanced, commonly 2-4% above the Bank of England base rate (sitting around 3.75% through 2026), charged only on the amount drawn and only for the time it’s actually outstanding
A worked example: raise a £10,000 invoice, receive an 80-90% advance, and by the time your customer pays, total combined costs typically land somewhere in the region of £200- £300, a genuinely small proportion of the invoice value in exchange for getting most of your money weeks, sometimes months, earlier than you otherwise would.
My top tip: ask for the total cost illustrated in pounds for a typical invoice at your actual turnover, not just the two percentage figures in isolation. It’s far easier to judge whether a quote is competitive once you can see the real number.
What are the different types of invoice factoring?
Factoring isn’t a single product, and the right variant depends on your risk appetite and how much of your ledger you want involved:
Recourse factoring
The most common arrangement. If a customer ultimately fails to pay, your business remains liable and must repay the advance. Because the provider carries less risk, recourse factoring is generally the cheaper option.
Non-recourse factoring
The provider absorbs the loss if a customer becomes insolvent, subject to the specific terms agreed. This offers genuine protection against bad debt, but typically costs more, and providers usually restrict it to invoices raised against customers they consider creditworthy in the first place.
Selective (spot) factoring
Rather than committing your entire sales ledger, you choose which individual invoices to factor. This suits businesses that only occasionally need to bridge a cash flow gap, or want to factor one large invoice rather than restructure their whole approach to invoicing.
Which UK providers operate in this space?
There are over 50 invoice factoring providers in the UK, independent companies, subsidiaries of larger financial institutions, and specialist platforms. Well-known names in the market include Sonovate, Close Brothers Invoice Finance, Bibby Financial Services, Ultimate Finance, and Aldermore Invoice Finance, though the right fit depends on your sector, turnover, and customer base rather than simply picking the biggest name.
Does factoring create debt on your balance sheet?
No, and this is a genuinely useful distinction. Factoring is the sale of an asset, your invoices, not a loan, so it doesn’t generate the kind of debt a term loan or overdraft would. For businesses concerned about gearing or how their balance sheet looks to future lenders or investors, this can be a meaningful advantage over debt-based finance.
What notice period applies if you want to end the arrangement?
Typically around three months, though this can extend to as long as a year with some providers. Worth checking this specifically before signing, since it affects how easily you can switch providers or move away from factoring altogether if your circumstances change.
Who does invoice factoring genuinely suit?
Particularly smaller businesses without an established internal credit control function, since the provider effectively supplies that function alongside the funding itself. It’s also accessible to newer businesses, since eligibility leans heavily on your customers’ creditworthiness rather than your own extensive trading history.
What should you check before choosing a factoring provider?
- The full cost in pounds, not just the two percentage figures, for a realistic invoice at your typical size
- Recourse or non-recourse, and whether the extra cost of non-recourse genuinely matches your bad debt risk
- The notice period, and what it takes to exit the arrangement
- Whether selective factoring is available, if you don’t want your entire ledger committed
- How the provider actually manages collections, since they’ll be interacting directly with your customers on your behalf
The bottom line
Invoice factoring converts unpaid invoices into fast, accessible cash, with the provider handling collections on your behalf, at a cost that’s usually smaller in real pounds than the headline percentages suggest once you actually run the numbers. Understanding the difference between recourse, non-recourse, and selective factoring, and comparing genuine total cost rather than just the service fee or discount rate in isolation, is what actually determines whether a specific provider’s offer represents good value for your business.
