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How invoice factoring works
Under factoring, you assign your invoices to a factor (a specialist finance provider). The factor advances a percentage of the face value — typically 70–90% — immediately, and takes over the credit control and collections function. When your customer pays the factor directly, the factor remits the remaining balance minus their fees.
Because the factor contacts your customers directly to collect payment, the arrangement is usually disclosed: your customers know the invoices have been assigned. This can affect how customers perceive your business, although factoring is common across many sectors and carries no stigma in most B2B environments.
How invoice discounting works
Invoice discounting also provides an advance against your invoices — at a similar advance rate — but you retain control of your sales ledger and credit control. The funder's involvement is confidential: your customers pay you as normal, and you remit funds to the funder as invoices are settled. The funder periodically verifies the ledger to ensure invoices are genuine.
Discounting is better suited to businesses with an established, competent credit control function and a customer base that would not welcome disclosure of a third-party finance arrangement. Lenders typically require a minimum turnover and ledger quality before offering confidential discounting facilities.
Recourse versus non-recourse arrangements
Under a recourse arrangement, if a customer fails to pay the invoice, the bad debt risk returns to you — the funder claws back the advance. You benefit from accelerated cash flow, but credit risk stays on your balance sheet.
Under a non-recourse arrangement, the funder absorbs the loss if the debtor defaults (subject to policy conditions). This is effectively a form of credit insurance bundled with the financing. Non-recourse facilities carry a higher fee. Whether the protection is worth the additional cost depends on your debtor concentration and the creditworthiness of your customer base. Compare the bundled cost against standalone trade credit insurance.
Costs and contractual considerations
Invoice finance costs typically comprise a service fee (a percentage of turnover, covering administration) and a discount charge (interest on the advances drawn, often expressed as a margin over SONIA or base rate). The total cost varies by facility type, provider, and your business profile — treat any figures given in marketing materials as illustrative until you have a formal offer.
Watch for: minimum fee clauses (a minimum monthly charge regardless of usage), concentration limits (the proportion of your ledger one debtor can represent), and termination notice periods. Facilities are usually 12-month rolling contracts with notice periods of 30–90 days.
Frequently asked questions
Does using invoice finance affect our credit rating as a business?
Invoice finance facilities are typically secured against receivables, not the company's general assets. They do not automatically appear as debt on your balance sheet in the same way a term loan does under IFRS/FRS accounting (depending on the structure). However, some lenders will see them when reviewing your business. Confirm accounting treatment with your accountant.
Can we factor invoices raised to connected parties or overseas customers?
Most factors exclude intra-group invoices as they do not represent arm's-length debts. Overseas debtors are often accepted but may require export credit insurance and attract different advance rates. Confirm eligibility criteria directly with the provider.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.