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Invoice Factoring: A Small Business Funding Solution

Small businessDo you want to know more about a flexible funding alternative for small businesses?

Keep on reading, because by the end of this guide you will know how Invoice Factoring helps your small business, which UK providers offer small business-friendly solutions, and what you need to look out for before making a decision.

I’m guessing you have heard of Invoice Factoring, and know that it is a popular form of Invoice Finance that is an alternative to traditional bank loans and overdrafts.

But deep down, you’re afraid that it might not be the right fit because let’s face it: small businesses have unique funding needs.

Don’t worry!

There are plenty of providers right here in the UK that offer small business-friendly Invoice Factoring solutions. This includes Single Invoice Factoring that has only one simple fee and no long-term contracts.

So, grab a seat and let’s get started on this guide to Invoice Factoring for small businesses.

In this guide you will find

Invoice Factoring Overview


Before you continue any further, let’s quickly go over Invoice Factoring. You’ll have a chance to re-familiarise yourself with the essential components such as how it works, what costs are involved, and the different forms of Invoice Factoring.


Who Uses Invoice Factoring?

Invoice Factoring is used by businesses that sell to other businesses (or the government) on credit terms. Therefore, if you operate in the B2B or B2G sector and have slow-paying invoices you want to fund, then Invoice Factoring is a viable option.

Simply put, Invoice Factoring immediately releases funds that are tied up in your invoices. These funds are used for a variety of business activities such as covering daily expenses, growing your business, facilitating buyouts, or just making sure you are prepared for any unplanned surprises.

One thing that Invoice Factoring users agree on is that it gives them peace of mind, because they no longer wait for slow-paying invoices and can run their businesses more effectively.


How Does Invoice Factoring Work?

In general, Invoice Factoring is much faster and straightforward funding solution than traditional bank loans and overdrafts. You sell your invoices to a provider at a discount, and receive 70% to 90% of your invoice value within 24 hours.

There are over 50 Invoice Factoring providers in the UK that are either independent companies, financial institutions, or brokerage firms that connect you to suitable providers.

For extra security, your provider credit checks your customers to ensure their creditworthiness. They only fund approved invoices to customers with good credit history, so make sure you don’t have any risky customers that have accumulated bad debt.

Invoice Factoring providers also handle your credit control and payment collections, which relieves you of that burden and gives you more time to focus on running your business.

This is a game-changer if your business is not yet large enough to have a functioning in-house credit control and collections department.

Your provider notifies your customer to inform them of your new working relationship, and provides instructions on how to settle their invoice. Once your customer makes their payment to the provider, you’ll receive the remaining invoice balance minus fees.

What’s more, you also have the option to purchase Bad Debt Protection to be used in conjunction with your Invoice Factoring facility. Also known as Non-Recourse Factoring, it protects your finances in the event that your customer is unable to settle their invoice due to insolvency or other credit reasons.


Costs of Invoice Factoring

The basic costs of Invoice Factoring are the discount charge and service fee. You can expect to face these two charges with every provider, but what exactly are they?

The discount charge is basically an interest rate on the money lent. It is 0.5% to 5% over base rate, and is applied on a daily basis.

The service fee is the cost of running your Invoice Factoring facility, and is typically up to 3% of your annual turnover. This rate will vary based on your business size, invoice volume, and invoice value.

When you enter into a contract, you’ll also face other costs such as annual fees, minimum usage fees, and administrative charges.

But don’t worry, your provider will clearly outline these costs in your contract, so that you don’t get any unfortunate surprises down the road.


Types of Invoice Factoring

Invoice Factoring solutions normally are whole-turnover, which means that you are factoring your entire sales ledger. This is more cost-effective for the provider, and also gives you access to more working capital.

However, if you want to factor a single invoice or specific invoices in your sales ledger, you should use Single Invoice Factoring. This allows you to choose which invoices you want to factor, and is a great solution if you only need a small amount of funding or a short-term solution.

Many Invoice Factoring providers also offer Export Factoring to businesses that trade overseas. This allows you to also factor invoices to foreign clients, while your provider helps you with challenges that come with exporting such as international laws, regulations, and language.

Finally, you also have the choice between Recourse Factoring and Non-Recourse Factoring.

In the event that your customer becomes insolvent and cannot make payment, Recourse Factoring gives your provider the legal right to demand payment from you. This means you have to pay the entire invoice value, plus the discount and service charges.

While Non-Recourse Factoring (or Bad Debt Protection) means that you have no responsibility or liability for an agreed percentage of your invoice value. As a result, your provider takes on the burden of credit risk and allows you to use the advanced funds worry-free.

Awesome! Now that you’ve completed the quick refresher about Invoice Factoring, let’s discover how Invoice Factoring is used by small businesses.


Invoice Factoring for Small Businesses


One of the biggest challenges facing small businesses is cash flow gaps created from pesky slow-paying invoices. As a B2B company that sells on credit terms, you’re probably all too familiar with this issue.

Invoice Factoring provides a solution to this cash flow problem by giving you immediate access to working capital that is tied-up in your invoices.

What can you do with these funds? Anything!

You can use the working capital to cover daily expenses, fulfill customer orders, and grow your business. Either way, Invoice Factoring means that you no longer have to wait for invoices to pay out in order to use the funds to run your business.

Another reason why Invoice Factoring is ideal for small businesses is its flexibility and speed.

The application process is much faster than traditional bank funding, and most providers will give you an answer within 24 hours. You also receive the working capital advance within 24 hours of submitting your invoice to the provider, which is an advantage if you have urgent funding needs.

Additionally, providers that offer small businesses-specific solutions won’t require you to factor your entire sales ledger or tie you into a long-term contract. They fund the invoices you choose and offer simple, transparent fees.

As your business grows, your funding needs will also increase. Invoice Factoring facilities grow in line with your sales, which means you will always have access to the working capital you require without having to go through a lengthy process to apply for more funding.

Furthermore, Invoice Factoring is undeniably more inclusive than traditional bank funding.

Most small businesses don’t qualify for bank loans and overdrafts due to low turnovers or unstable trading histories. If either of these scenarios sound familiar to you, then you’re in luck.

Invoice Factoring providers offer products and services that are specifically designed for all types of small businesses such as startups and phoenix businesses. They understand that your business is more than just financial statements, and will take into account other aspects of your business.


Should You Use Invoice Factoring?


If you are a B2B company that sells on credit terms, chances are that Invoice Factoring is an available funding option.

But maybe you’re hesitant to enter foreign territory because you’ve never tried Invoice Factoring before.

Ask yourself the following questions:

  • Can your current cash flow accommodate business growth?
  • Are you able to comfortably take on new customers while keeping up with ongoing orders?
  • Are you prepared for any unplanned events that may require extra working capital?

If your answers are within the “No” to “Maybe” range, then you should consider Invoice Factoring.

Don’t worry, you’re not alone. Hardly any businesses with slow-paying invoices have perfect working capital availability within their own resources, and use a funding solution such as Invoice Factoring.

In fact, 15,578 businesses in the UK used domestic Invoice Factoring between September 2016 and September 2017.

What’s more, the Asset Based Finance Association also reported that businesses with annual turnovers of £500,000 or less were one of the major clients of Invoice Finance.

So if you are now seriously considering Invoice Factoring, then you should have a look at the following tips:

  • Regular Invoice Factoring solutions have a minimum annual turnover requirement that ranges from £50,000 to £250,000. But some providers offer small business solutions that accommodate startups and businesses with lower turnovers.
  • Decrease the credit risk to your business and your Invoice Factoring provider by ensuring that the value of your invoices is spread out amongst a wide range of customers.
  • Make sure your customers are creditworthy, since Invoice Factoring providers won’t fund invoices to customers with low credit ratings and a history of bad debt.


What Are Your Options?


Invoice Factoring gives you the best results when you work with the right provider. There are over 50 Invoice Factoring providers within the UK, and they all range in type, quality, and suitability. As a result, making a decision is often a daunting task for small businesses.

But keep calm, because right here you’ll find out about small business-friendly Invoice Factoring options in the UK.

Invoice Factoring companies are either:

  • Independent providers
  • Part of a financial institution
  • Brokerage firms that introduces you to suitable Invoice Factoring providers

Although brokerage firms don’t quite qualify as ‘providers’, they still connect you with buyers for your invoices and have the expertise to advise you on finding the right solution.

Below you’ll find a few different highly-rated and popular choices for Invoice Factoring in the UK. They have qualities that are ideal for small businesses such as low annual turnover requirements, personable customer service, transparency, and small business-specific solutions.


Touch Financial – Brokerage Firm

As the UK’s largest independent Invoice Finance brokerage, Touch Financial has relationships with over 30 of the top domestic providers. Their consultants look at your business and funding needs to provide you with the best Invoice Factoring options.

They even offer additional services such as ‘Start Up Funding’, which provides assistance with back-office functions such as invoicing and order processing.

If you are unfamiliar with Invoice Factoring providers and want guidance, then Touch Financial is a great option. Their relationships with providers mean that Touch Financial knows each of them inside out, and are able to help you identify which ones are the most suitable for your business.


Bibby Financial Services – Independent Company

Bibby Financial Services is a multinational corporation that provides financial services, including Invoice Factoring. They offer accessible customer service with 18 office locations in the UK, and local networks of Invoice Factoring specialists that are easily reachable.

Besides their regular Invoice Factoring solution, Bibby also offers ‘Forward Finance’ that is especially designed for small businesses with annual turnovers less than £300,000. They also offer both fixed term and unlimited rolling contracts to match your needs.


Metro Bank – Financial Institution

Metro Bank is a new, modern retail bank that prides itself in being an “Entrepreneur’s Bank”, through understanding and providing services that are tailored to the needs of modern businesses. Their Invoice Factoring solution has no specified minimum annual turnover, as they aim to understand your business before making a decision.

Additionally, they have a ‘Small Business Offering’ for companies that only need funds up to £100,000. This solution only requires one single fee, with no additional charges such as set up and minimum usage fees.

Metro Bank stores are open all 7 days and their customer service is remarkably personable, fast, and helpful.

You’re almost done! Before you begin your Invoice Factoring journey, here’s a useful checklist of features to look out for in an Invoice Factoring solution.


Invoice Factoring Checklist for Small Businesses


Make sure that your chosen Invoice Factoring solution ticks all the boxes below, and you’ll be all set to start reaping the rewards of Invoice Factoring!

  • Clear and simple fees
  • Flexible contracts
  • Invoice Factoring solution is in line with your business and funding needs
  • Straightforward and quick application process
  • Personable and efficient customer service
  • Strong reputation




All in all, Invoice Factoring is a fast, flexible funding solution for B2B and B2G companies to release working capital tied-up in invoices. It is a much more small business-friendly option compared to traditional bank funding, which tends to have higher requirements and incredibly slow application processes.

Many Invoice Factoring providers also offer short-term agreements such as unlimited rolling contracts and pay-as-you-go schemes. Their costs are remarkably transparent, with some providers offering Invoice Factoring for small businesses that only require one single fee.

If you’re new to Invoice Factoring and need help, you should consider working with brokerage firms that put you in touch with the most suitable Invoice Factoring providers. Their strong relationships with providers means that brokerage firms are able to get you the most competitive deals in the market.

Once you start using Invoice Factoring, you will see an improvement in your cash flow that enables you to finally focus on growing your small business and set larger milestones. And good news – when your business expands and your working capital requirements increase, your Invoice Factoring facilities also grows to grant you access to even more funds.

That’s it!

You’re now ready to put your knowledge of Small Business Invoice Factoring to use by selecting an appropriate Invoice Factoring solution for your business.

Good luck, and let us know how it goes.


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