If you run a B2B business and find yourself waiting 30, 60, or even 90 days for your customers to pay, invoice factoring could be the solution.
Invoice factoring is a type of invoice finance in which a third-party provider “buys” your customer’s unpaid invoices and advances you 80-90% of the cash upfront. It is similar to invoice discounting, except that invoice factoring providers take on your entire sales ledger and collections process rather than just loaning you the funds— meaning no more chasing customers for payment!
For smaller teams with no dedicated finance or collections department, factoring is a great way to cover gaps in your cash flow. It’s also far more accessible than a traditional bank loan, albeit slightly more expensive.
In this article, we’ll explain the process of invoice factoring and answer some frequently asked questions about this type of invoice finance.
How Does Invoice Factoring Work?
Invoice factoring is a form of invoice finance for UK businesses. Within a factoring arrangement, you sell your unpaid invoices to a provider or factoring company to unlock immediate cash, instead of waiting weeks or months for your customers to pay. Most cash advances are paid in as little as 24-48 hours.
The process typically follows four steps:
You invoice the customer: Once you’ve delivered the goods or services, you send an invoice with standard payment terms (e.g., Net 30).
You submit the invoice to an invoice factoring company: The provider will verify the invoice to make sure you’re eligible for invoice factoring.
You get your cash: If approved, you receive a percentage of the invoice’s value—typically 80-90%—in roughly 1-2 days.
The customer pays the factoring company: Instead of paying the invoice to you, the customer will pay the provider when the invoice is due. Once paid, the factoring provider will send you the remaining balance, minus their fee.
Recourse vs Non-Recourse Factoring
When setting up an invoice factoring arrangement, you must choose between recourse and non-recourse factoring. This dictates who absorbs the risk if your customer goes out of business or fails to pay.
Recourse factoring: If the customer fails to pay, your business is responsible for covering the amount owed. This is usually the lower-cost option.
Non-recourse factoring: If the customer can’t pay, the factoring provider absorbs the loss. Initial fees are higher with this option, but the trade-off is extra protection for your business.
Who Is Invoice Factoring For?
Invoice factoring is primarily designed for B2B (business-to-business) and B2G (business-to-government) companies that sell products or services to other organisations on credit.
As young companies often lack the financial history, collateral, or profitability to apply for large bank loans, invoice factoring is a great resource for startups and new businesses, allowing them to unlock working capital, fulfill large orders, and grow without taking on traditional debt.
Invoice factoring also works well for businesses that struggle to pay staff and rent due to long customer payment terms. It shortens the waiting period between the invoice being sent and the money hitting your account, helping smooth over daily operations and cover gaps in cash flow.
Businesses that face seasonal spikes in demand may also use invoice factoring (or occasional spot factoring) to fund inventory and temporary staffing. It’s also great for industries with high upfront supplier costs, such as manufacturing, allowing leaders to pay for raw materials and specialised labor upfront.
What Does Invoice Factoring Cost?
Cost is one of the main considerations for businesses exploring invoice finance options like factoring. And it makes sense—if you’re struggling with cash flow, the last thing you want is to be hit with a bunch of fees and additional costs.
The British Business Bank advises B2B companies to review the full costs carefully before committing to invoice finance solutions. This is because fees can vary widely depending on your provider and facility, as well as the level of credit control included.
Generally, invoice factoring usually costs between 1% and 5% of the total invoice value.[3] However, because of APR, this often works out more expensive than it sounds. A company may say that they charge 2% for 30 days, and this means you’re paying 2% every month, rather than for the whole year, until the debt is paid. This means, if it takes your client 90 days to pay, your fee would be 6% of the advanced amount.
Fees can quickly add up, especially if your client has long payment terms. But many small businesses believe that the speed and convenience of invoice factoring is worth the cost. A regular business loan might be cheaper, but it will take weeks to arrange, and if you run a smaller business with limited financial history, you may fail to qualify.
For an in-depth breakdown, check out our full guide on the costs of invoice factoring.
Do I Qualify for Invoice Factoring?
You will qualify for most invoice finance solutions if you run a B2B or B2G operation selling to other registered businesses or government entities. Factoring companies do not usually buy B2C invoices. Eligible invoices must be for completed services or goods that have already been delivered and approved.
During the invoice factoring process, the lender assesses your customers’ creditworthiness to determine how likely they are to pay on time. This means you don’t need to have a long financial history or perfect credit to be accepted.
Your invoices must be free of legal liens and previous financing claims. You cannot invoice speculative future work or milestone billing where the client can dispute the quality of the goods or services they receive.
Some larger businesses prefer invoice discounting, where they maintain control of customer communications and collect the payments in-house. This offers a layer of discretion, as your customers will never know you’ve used an invoice finance lender, and you’ll still get 80-90% of the invoice upfront.
The Institute of Credit Management emphasises the importance of strong credit assessment when providers are vetting your customers, but they also assess your business for “disciplined debtor management.”[4] This means you should be sending invoices correctly and promptly, keeping accurate records, and communicating clear payment terms. If your invoices are incorrect or don’t contain necessary information, your application may be rejected.
See our guide on how to write an invoice for more information.
| Invoice financing requirement | Why it matters |
|---|---|
| B2B or public sector invoices | Factoring works best when invoices are raised against other businesses or public bodies rather than consumers |
| Completed work with valid proof | Providers need to know that the invoice is legitimate, undisputed, and due for payment |
| Creditworthy customers | The stronger your debtor book, the better your advance rate and fee structure is likely to be |
| Consistent, accurate invoicing | Regular invoice flow makes the facility easier to structure and manage |
| Clear ledger management | Providers need to see that your accounts receivable records are accurate and up to date |
What’s the Difference Between Invoice Factoring and Traditional Loans?
The main difference between invoice factoring and a traditional loan from a bank is that a bank gives you borrowed money, while invoice factoring gives you early access to money your customers already owe.
Bank loans are usually cheaper with better interest rates, but you’ll usually receive a one-time lump sum to be paid back over several years. Invoice factoring funds your eligible invoices as you raise them. It becomes an ongoing part of your cash-flow system rather than a single injection of cash.
Many businesses choose to get a bank loan and use invoice factoring at the same time. You might need the bank loan to fund a business expansion or new equipment, but use invoice factoring or discounting for support with your ongoing cash flow. There are many types of invoice finance, and each one has a slightly different purpose.
Is Invoice Factoring Right for Your Business?
Invoice factoring can work well for many different businesses experiencing cash flow gaps. It is particularly useful in recruitment, manufacturing, logistics, and other B2B sectors where long payment cycles are common, especially if your company is new or growing quickly.
It can also make sense to use invoice factoring if your operation depends on temporary labour and fast-moving payroll cycles. For example, recruitment agencies frequently rely on recruitment invoice finance to support their weekly contractor payroll while they wait 60 days for end-clients to settle the bill.
If your business already has a strong internal finance team and wants to keep funding arrangements private, factoring may not be the best fit. In that case, discounting or another working capital product could be more appropriate. The right solution depends on your customer relationships, internal admin capacity, and how quickly you need your cash.
Invoice Factoring FAQs
What is invoice factoring?
Invoice factoring is a commercial finance solution that allows B2B or B2G businesses to unlock cash from unpaid invoices. A provider advances most of the invoice value upfront and then collects payment from the customer when it’s due.
How much does invoice factoring cost?
Invoice factoring typically costs between 1% and 5% of the invoice value, depending on the quality of your debtor book, the level of service you need, and how long your customers take to pay.
Is invoice factoring better than a bank loan?
Invoice factoring is often faster and more flexible than a traditional bank loan because the funding is secured against invoices you have already raised. It can be especially useful for growing businesses with long payment cycles and limited hard assets. However, fees are often slightly higher.
Turn Your Unpaid Customer Invoices Into Instant Cash
Waiting 60-90 days for your client to actually pay drains your working capital and can halt your business growth.
If your invoices are trapped in long payment cycles, invoice finance bridges the gap instantly.
Compare quotes from FCA-regulated providers and unlock your trapped cash today.
References
UK Finance. “Business Finance Review 2024.” Retrieved 2026 from: https://www.ukfinance.org.uk/system/files/2025-03/Business%20Finance%20Review%202024%20Q4_0.pdf
British Business Bank. “Finance guidance for businesses.” Retrieved 2026 from: https://www.british-business-bank.co.uk/business-guidance/guidance-articles/finance/
Funding Circle. “How much does invoice factoring cost?” Retrieved 2026 from: https://www.fundingcircle.com/uk/resources/business-finance/invoice-factoring-costs/
Institute of Credit Management. “Professional standards and credit management guidance.” Retrieved from: https://www.icm.org.uk/
