Invoice Factoring

Written by Jamie Moorcroft | Reviewed by Richard Wilcock | Updated: July 21, 2026

Table of contents

• What is invoice factoring?
• How does invoice factoring work?
• Invoice factoring advantages and disadvantages
• How much does invoice factoring cost?
• Invoice factoring calculator
• What are the types of invoice factoring?
• Invoice factoring vs invoice discounting: what's the difference?
• Is invoice factoring right for my business?
• Will my customers know I’m using a factoring company?
• Is my business eligible for invoice factoring?
• Invoice factoring FAQs

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What is invoice factoring?

Invoice factoring, sometimes known as debt factoring, is a form of invoice finance. And it’s a way for businesses to release funds against an unpaid customer invoice or your entire debtor book.

Everyone likes getting paid; it’s a pretty good feeling. But when you invoice your customer, you have to resign yourself to the fact that payment can take a long time. Invoice factoring presses fast-forward on this process by granting you access to up to 95% of the unpaid invoice amount quickly.

You sell the invoice amount to a factoring company, which then releases the funds to you. Your customer pays the factoring company, and they take their fees off and release the remainder back to you.

It’s a great way to promote healthy cash flow, which means you’re never behind on paying bills, rent, or staff wages. Many companies also use invoice factoring to release large sums of money to inject into a new project or expand into new markets.

Late payment is a fact of life for UK firms. Businesses are owed an estimated £26 billion in late payments at any given time, an average of £17,000 per affected business, according to the Small Business Commissioner. Invoice factoring turns that waiting money into working capital you can use for wages, stock, bills, or growth.

How does invoice factoring work?

The invoice factoring process is straightforward:

1. Invoice your customers as normal and send a copy to the factoring company.
2. Receive up to 95% of the invoice value upfront, often within 24 hours.
3. The factoring company chases and collects payment directly from your customer.
4. Once the customer pays in full, you receive the remaining balance minus the factoring company's fees.

Let’s say you've invoiced a customer £50,000 on 90-day payment terms. Rather than waiting three months, factoring releases up to £47,500 (95%) almost immediately, and the factoring company handles collection from there. Because the provider manages your sales ledger for you, factoring suits businesses that would rather spend time winning work than chasing payments.

You can relax, knowing you can access funds tied up in the unpaid invoice almost instantly through a factoring company.

Cash flow is a problem that plagues many UK SMEs, but with invoice factoring, you don’t need to lose sleep over unpaid invoices. Sell a percentage of the total invoice value and pay a fee to the factoring company for the privilege of fast cash.

Invoice factoring advantages and disadvantages

Although invoice factoring, or debt factoring, can be a dependable source of cash for any SME, it’s crucial to weigh up the pros and cons before making a final decision. So, what are the advantages and disadvantages of debt factoring?

The advantages of invoice factoring

• Predictable cash flow – pay wages on time every time, invest in new markets, buy more stock.
• Quick access to cash – you don’t have to wait around for your customer to pay your invoice.
• Less admin work for you – with debt factoring, the factoring company manages your credit control, so there’s no need to worry about chasing customer payments, it’s all done for you.

The disadvantages of invoice factoring

• Handing over credit control can damage relationships – having a third party come and chase customers for payments might damage your relationships.
• Invoice factoring is expensive – but if your business has high-profit margins, you can absorb this cost, making it a worthwhile investment.
• No confidentiality - as the factoring company will chase customers for payment, you have to tell your customers you’re working with them.

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How much does invoice factoring cost?

There are two main invoice factoring costs to consider. The first is called a “factor rate” and costs between 1-5% of the invoice value. The other is a “management/service charge”, this fee can range anywhere between 0.5% and 3% or more of your annual turnover. This charge includes debt collection and sales ledger management.

Invoice factoring fees vary depending on the factoring company.. Costs also vary depending on the size of your business turnover, the value of your invoices and, of course, if you present any risk.

Invoice factoring rates: When it comes to factoring fees, some companies offer flat fee structures with one up front fee, while others may charge a certain amount for the first 30 days and an extra fee for any following day the invoice remains unpaid.

How much will you get?

For example, your company has unpaid customer invoices totalling £15,000, you’re short on cash, or you want to inject it into a new project you’re launching. You decide to sell or “factor” 95% of the invoice value to your factoring company and receive £14,250 in return.

The finance provider then chases the customer for the outstanding payment. Once the customer pays the invoice, the factoring company will remove any applicable fees and charges, including the factor rate and service fees, and return the remaining invoice value to you. So, in this example, if the fees totalled 1.5%, you could expect to pay estimated fees of £225, with £525 being returned to you once the customer has paid the invoice in full.

Invoice factoring calculator

Find out the estimated fees and how much you could raise by using our easy-to-use invoice factoring calculator.

What are the types of invoice factoring?

It would be best if you researched the different types of invoice factoring before you sign on the dotted line. The four types vary significantly, read more about each below.

Recourse Factoring

This type of invoice factoring facility means you’re responsible for repaying any debts your factoring company cannot collect from your client. It simply does not include an invoice insurance product that protects against this bad debt. If your client misses your invoice deadline, the factoring company needs to take funds from your business, so they aren’t out of pocket.

This means less risk for the lender, but a much greater risk for your company. Recourse factoring is still an excellent option to get access to cash quickly for your business, just know that you will be responsible for full payment should the client or customer default or become insolvent.

Non-Recourse Factoring

As you’d imagine, this is the opposite of recourse factoring. Non-recourse factoring is where the factoring company will take all responsibility for all unpaid debts. This means your invoices will be covered by a bad debt protection insurance plan.

Although you might find a factoring company offering this facility, it isn’t commonplace, and the fees will be higher as there’s a greater risk to the factoring company.

Whole turnover factoring

With this facility, you sell or “factor” every invoice you issue to your customers. Whole turnover factoring is the only factoring facility that will guarantee your company a steady cash flow. Any business that values healthy cash flow can choose this option.

Selective, Single and Spot factoring

Selective invoice factoring, single invoice factoring and spot factoring are all names for the same flexible facility: you choose which invoices to sell. With selective factoring, you can choose which invoices you sell. Sell one or more of your unpaid invoices, but be warned, as a facility, spot factoring can be expensive.

This facility gives you ultimate control and is perfect for SMEs who have trustworthy clients.

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Invoice factoring vs invoice discounting: what's the difference?

When customers weigh up invoice factoring vs discounting, the main difference between them is that in invoice factoring, the factoring company will take over your credit control process. They’ll chase customers to ensure the unpaid invoices are paid in full. This does risk damage to your current customer relationships.

With invoice discounting, however, you remain entirely in control of your credit control process. This will mean more admin for you, but if you don’t like the idea of relinquishing control, then invoice discounting could be the better option.

Is invoice factoring right for my business?

Invoice factoring could be a good fit if:

• You invoice other businesses on payment terms of 30 days or more
• Late payments regularly squeeze your cash flow
• You'd rather a specialist handled credit control and collections
• You're spending hours each week chasing unpaid invoices
• Your margins can comfortably absorb the fees

If you'd prefer to keep credit control in-house and keep the arrangement private from customers, invoice discounting is likely the better route. And if you only have the occasional slow-paying invoice, selective invoice finance gives you funding on your terms.

Will my customers know I’m using a factoring company?

Yes, invoice factoring means your customers deal with the factoring company when it's time to pay. Reputable factoring companies are professional in how they collect, and many businesses find that customers treat it as business as usual.

If discretion matters to you, there are alternatives. Invoice discounting is confidential, so customers never know a funder is involved. There's also CHOCCS (short for Client Handles Own Credit Control), a halfway option where you keep collecting payments yourself while still unlocking cash from your invoices.

Is my business eligible for invoice factoring?

Does this sound like you? Do you operate a UK-registered PLC, LLP or limited company and invoice business customers for products and services? Then, you could be eligible for invoice factoring.

• UK-Registered business
• Limited, partnership and sole traders accepted
• A minimum turnover may be required (No minimum turnover for selective invoice factoring)
• Provide goods or services to other businesses

Why choose Capalona?

We work with trusted UK lenders to help businesses, just like you, secure the funding they need to grow. We’re passionate about helping SMEs, let us help you.

A few more benefits:

• Get matched to the right finance options for your needs
• Compare invoice factoring companies side by side
• Our online business finance matching platform is 100% free to use
• We have a large panel of trusted UK lenders
• Our service is fast and effective

Ready to check your eligibility for invoice factoring? Get started today!

Invoice factoring FAQs

About the author

Written by Jamie Moorcroft

Money Writer, Director and Co-Founder

Jamie has over 16 years of experience in the consumer and business finance industry, and with a background in graphic design, Jamie heads up the creative and design team at Capalona.

Updated: July 21, 2026
Published: September 20, 2017