Invoice factoring lets UK businesses release cash tied up in unpaid invoices – typically receiving 80–90% of invoice value within 24 hours, with the remainder (minus fees) paid when the customer settles. Unlike an overdraft or business loan, invoice factoring scales with your sales: the more you invoice, the more working capital you can access. This guide explains how factoring works, what it costs, and when it’s the right choice for your business.
- Receive 80-90% invoice value within 24 hours - Immediate working capital release significantly faster than traditional business lending
- Total costs range 2-5% annually - Combined service and finance charges vary widely between providers and client risk profiles
- Minimum 6-month trading history required - Most providers need established invoicing track record and consistent B2B customer base
- Factor handles all debt collection - Provider manages customer payments unlike discounting where you maintain collection responsibility
- Bad debt protection available - Non-recourse facilities eliminate client default risk but cost 0.5-1% additional fees
What Is Invoice Factoring?
Invoice factoring is a financing arrangement where a business sells its unpaid invoices to a third party (the factor) at a discount, in exchange for immediate cash. The factor pays 80–90% of the invoice value upfront, then collects the debt directly from your customer. When the customer pays, the factor remits the remaining balance minus its fees. Unlike invoice discounting, factoring is “disclosed” – your customers know the factor is involved, as they receive payment instructions from the factor.
Invoice factoring works by transferring the credit risk and collections burden to the factoring company. Once you raise an invoice, the factor verifies it and advances funds against it – usually within 24 hours. The factor then becomes responsible for chasing the customer for payment. This is the key difference from invoice discounting: with factoring, credit control is outsourced to the factor; with discounting, you retain credit control and your customers remain unaware of the finance arrangement. For more on this, read our Invoice Finance Overview. Our Working Capital Finance UK covers this in depth. Check our RBS FacFlow Invoice Finance Review for a closer look.
How Invoice Factoring Works: Step by Step
The invoice factoring process has five steps: (1) you raise an invoice for goods or services delivered; (2) you submit the invoice to the factor; (3) the factor advances 80–90% of the invoice value within 24 hours; (4) your customer pays the factor directly (payment instructions redirect to the factor’s collection account); (5) once the customer pays, the factor remits the remaining balance minus its service and finance charges. The factor handles all credit control and debt chasing in steps 3–5.
Invoice Factoring Costs
Invoice factoring typically has two fee components: a finance charge (daily interest on the advanced amount – usually expressed as a percentage above the Bank of England base rate, typically 1.5–4% per annum) and a service charge (covering credit control and administration – typically 0.5–3% of annual turnover). With the base rate at 3.75% (March 2026), total effective cost for a typical factoring facility is approximately 3–8% of the invoice value per 30 days of funding. The longer invoices take to pay, the more the finance charge accumulates.
| Fee Component | Typical Range | How Charged | Notes |
|---|---|---|---|
| Finance charge | Base rate + 1.5–4% p.a. | Daily on advanced amount | Equivalent to ~7–10% total annualised on drawn funds |
| Service charge | 0.5–3% of annual turnover | Monthly or quarterly | Covers credit control, collections, admin |
| Arrangement fee | 0–£1,500 | On drawdown | Not all providers charge; larger facilities often waive |
| Minimum facility fee | £500–£2,000 p.a. | Annual or monthly | Applies if actual service charge falls below minimum |
Invoice Factoring vs Invoice Discounting
The key difference: factoring is disclosed (your customers know about the factor) and the factor handles credit control. Discounting is confidential (your customers are unaware) and you retain credit control. Factoring is typically chosen by smaller businesses without a dedicated finance team – the outsourced credit control function adds value. Discounting is preferred by larger businesses that want to maintain direct customer relationships and keep their finance arrangements private. Discounting generally requires higher turnover (£500K+) to qualify. See our Invoice Discounting UK for the full picture.
| Factor | Invoice Factoring | Invoice Discounting |
|---|---|---|
| Disclosure to customers | Yes – customers know | No – confidential |
| Credit control | Provider manages | You manage |
| Min. turnover | £50K–£100K (varies) | £500K+ (typically) |
| Admin burden on business | Lower (factor handles collections) | Higher (you maintain ledger) |
| Typical service charge | 0.75–3% of turnover | 0.25–0.75% of turnover |
| Best for | SMEs without credit control resource | Larger businesses with finance teams |
Invoice Factoring Eligibility
To be eligible for UK invoice factoring you typically need: a B2B business (you invoice other businesses, not consumers), a minimum of £50,000–£100,000 in annual invoiced sales (varies by provider – Novuna’s minimum is £50,000), invoices with payment terms of 14–120 days, and invoices that are undisputed and for goods or services already delivered. Businesses that invoice the government or NHS are often accepted even at lower turnover levels. Sole traders, consumer-facing businesses, and construction firms with disputed retentions may face restrictions.
Best Invoice Factoring Providers UK 2026
Top-rated UK invoice factoring providers include: Novuna Business Cash Flow (minimum £50,000 turnover, 4.8/5 Feefo, Lender of the Year 2026), Bibby Financial Services (largest independent provider, £100K minimum, multi-sector), Close Brothers Commercial Finance (Part of FTSE-listed Close Brothers Group, mid-market focus), Skipton Business Finance (building society-backed, competitive rates), and Pulse Finance (independent, relationship-managed, up to £5M facility). For digital-first selective invoice funding with no long-term contract, Kriya (formerly MarketFinance) offers a pay-as-you-go model. You can compare options in our Best Invoice Factoring Companies UK 2026. We explore this further in our Business Finance Costs & Rates 2026. For alternatives, see our Pulse Finance Review.
Invoice Factoring vs Invoice Discounting
The key difference is credit control: with factoring, the finance provider manages collections and chases your customers for payment; with discounting, you retain full credit control and your customers are unaware of the finance arrangement. Factoring is more expensive (higher service charge) but reduces your administrative burden. Discounting is cheaper and confidential but requires you to have a robust internal credit control function. Most providers offer both; your choice depends on whether you want to outsource collections or keep customer relationships private.
| Factor | Invoice Factoring | Invoice Discounting |
|---|---|---|
| Credit control | Provider manages | You manage |
| Confidentiality | Disclosed (customers know) | Confidential (customers unaware) |
| Service charge | Higher (0.5–3% of turnover) | Lower (0.1–0.75% of turnover) |
| Typical min. turnover | £50,000–no minimum | £300,000–£500,000 |
| Best for | Smaller businesses, startups, those without credit control resource | Established businesses with internal finance teams |
Pros and Cons
