Invoice Factoring

Invoice financing is an umbrella term that includes factoring within its remit. Invoice financing also includes other financing solutions, such as invoice discounting, which is more similar to a loan than a sale, while invoice factoring involves selling off all or parts of your sales ledger.  

With over 120 lenders in our network offering up to £20M, we help eligible businesses find invoice factoring at competitive rates, with fast approvals, and flexible terms. We have a wide range of uplifting customer stories available for your perusal, including: 

• Helping Revive Joinery expand their carpentry and furniture-making workshop.  

• Helping Indie Brands boost their business’ growth with additional working capital. 

• Supporting Hayley Katnis in gaining the funding she needed to establish her new international business venture. 

With over 18,000 happy customers and more than £862M in facilitated funding, we believe we’re the most suitable brokers to help you find the funding your company needs to grow. 

Costs depend on the lender and your personal circumstances, but generally you might be expected to pay approximately 1-5% of the total value of the invoice as a fee to the factoring company. You may also be asked to pay a service fee and possibly an admin fee in the form of an arrangement or origination fee. If your client takes longer than a month to pay, you may be asked to pay more than expected, so be careful to check your agreement with the factoring company before committing. 

Invoice factoring is particularly suited to small businesses, who often require additional cash flow support during the early stages of business growth. However, many lenders and factoring companies have minimum invoice value amounts and company revenue thresholds that they require of their customers before they commit to extend funding. Consider leveraging a broker like Funding Options by Tide to help you find a suitable lender who can help you reach your financing goals. 

B2B services companies are common users of invoice factoring, given the invoice heavy nature of their business. Similarly, transportation, healthcare, staffing, manufacturing, and construction companies are also regular users. However, industry is not usually a barrier to entry for this form of funding, so if your industry isn’t included in this list, but you do raise invoices, factoring may be of interest to you. 

In theory, you could get the funds within 24 hours, but it often takes longer than that. Once you’ve worked with a factoring company once, the process can speed up as they grow more familiar with you and your customers. 

No, invoice factoring is not a loan. It functions more like a sale – you’re selling your invoices off for a price and you receive part of the value of that invoice now, and part once the factoring company gets the funds back from your client. 

Start ups are another particularly strong use case for invoice factoring, however, like small businesses, it can be hard to find lenders who cater to start ups, as lenders look for high invoice volume and value. 

If you do find a lender who is suitable to you, as a start up, invoice factoring can help you get through those busy early years by providing consistent cash flow support, enabling you to focus on growth and obtaining new business. 

That depends on the type of invoice factoring you use. If you use recourse invoice factoring, you remain liable for the debt and will be required to buy back the invoice from the factoring company. If you opt instead for non-recourse factoring, you are not liable and the factoring company will deal with it on their end. 

There are, yes, but these vary by lender and agreement. When searching for a lender, let your chosen factoring company know early on what the value of your invoices is going to be, so they can let you know if they can cater to you or not. At Funding Options by Tide, we only help businesses find funding starting at £1,000. 

The most essential thing is that you must be a company that raises invoices. Your invoices must be legally valid, meaning they include payment terms and your company information, along with the amount requested and any relevant taxes included. 

Then, each factoring company will have their own qualifying requirements. For instance, some companies won’t provide factoring unless your customers are creditworthy, while others require their customers to have a minimum turnover. 

If used correctly (and carefully), there can be several ways you can use invoice factoring to support your business.

Cash flow

When invoices have long payment terms, invoice factoring can help business owners by providing the funds upfront, meaning businesses can still pay their rent, suppliers, and payroll while waiting for the end client to pay.

Larger projects

Sometimes, concern over the time between invoice payment and paying suppliers can cause businesses to turn down larger projects. Invoice factoring could help in this instance.

Admin

Some people hate chasing up and collecting invoices – if you don’t like to manage your sales ledger, some forms of invoice factoring could enable you to outsource part of this task. But do be aware, depending on the invoice factoring service you choose, you may still be responsible if the client doesn’t pay in the end. 

It can, yes. Invoice factoring is not confidential and usually includes involving a third party (the factoring company) in the processing and collection of your invoices, which adds distance between you and your client. The factoring company could pursue payment in ways that make you or your client uncomfortable, and if selling off of your invoices comes as a surprise to your client, that could weaken trust. If this is unsuitable to you, you might like to consider invoice discounting. 

All forms of finance need careful consideration, here are some of the factors you might want to take into consideration before engaging an invoice factoring company.

Customer relationships

Usually, your customers will need to change the account they pay into, the lender may run a credit check on your clients, and you will lose some of the control over your relationship with your customers. Consider if this is something you want to do.

Debt cycle

Once you’ve used invoice factoring once, it can be easy to begin using it all the time, which can quickly eat into your profit margins and become a long term expense. Think carefully about how likely you are to stop using invoice factoring once you’ve started. 

Unregulated

Invoice factoring is often unregulated in the UK, which means your rights as a consumer may not be as protected as you think. Before entering into an invoice factoring agreement, read over all the terms and conditions and consider enlisting support from a financial advisor or lawyer.

Please note that invoice finance is only as good as the strength of your debtors, customers will have to change the account they pay into, and it can be admin heavy.

With invoice factoring, your client pays the lender, so you get the cash quickly but the lender handles chasing payments. With invoice discounting you remain responsible for chasing up and collecting the payments. Invoice discounting is more confidential than invoice factoring as you may be able to access this form of funding without you or the lender needing to inform your client. Invoice discounting is also usually cheaper.

Yes, if you opt for spot factoring. Spot factoring is the term given when you choose the invoices you’d like to factor, rather than selling your entire ledger. 

Invoice factoring is sometimes referred to as “accounts receivable factoring.”

If you’ve heard the term “recourse factoring” and are wondering what it is – it’s a form of invoice factoring in which you still remain liable for the funds if the client doesn’t pay. 

Some businesses choose to opt for selective invoice finance, which is where you choose a select number of invoices to factor or discount, rather than borrowing against the entire ledger, this is also sometimes called spot factoring. 

They may simply ask you for your history with that particular company, for instance, they may inquire how many invoices you’ve sent them in the past and how often this specific client pays on time. 

They could check public records and review the client’s details on Companies House. If you’re concerned about this aspect of factoring, speak to someone on our team or reach out directly to the factoring company. 

A factoring agreement is a contract between you and the factoring company that outlines the conditions under which you will sell your invoices. It will likely include how many invoices you intend to sell, what the factoring company will pay, what happens if your client doesn't pay, and what fees the factoring company will charge. 

Maybe, it depends on the factoring company and whether they operate internationally. It is easier to find a factoring company that is purely UK based, but international options are available to eligible businesses. 

Similarly to the small business and start up situations, the fact that international factoring is trickier to find shouldn’t necessarily put you off, as it can be a particularly useful tool for international invoices, where payment collection processes can be more complicated and time consuming, and payment terms may be even longer. 

Yes, B2C companies who do not raise invoices or only raise very small invoices would not find invoice factoring to be beneficial. 

If invoice factoring doesn’t quite suit your business model, here are some other possible options.

Invoice discounting

Invoice discounting is similar to factoring, except it can be less expensive and you retain more control over your relationships with your customers. If you still want to be the one to send and chase invoices, this funding solution may be for you.

Bridging loan

A bridging loan enables you to bridge the gap between funding. Think of it like this – let’s say you want to buy a new office space for your team. The seller is ready to go now, and you want to move in as soon as possible, but you need to sell your old office space, finalise the contracts, and collect the funds before you can send them over to the seller and move in. A bridging loan provides you with the cash today to buy your office space and enables you to repay the full amount when your property is sold.

Merchant cash advance

A merchant cash advance is sort of like an investment mixed with a loan. Rather than taking out money and repaying via a monthly instalment, with interest charged as a percentage, instead, you receive a sum of money in exchange for a percentage of future earnings.

Bank loan 

A business loan is an agreement between you and a lender where they extend funds and you repay them over a given period, usually on a monthly basis with interest charged. A short term business loan may be a suitable alternative to invoice factoring if you want to borrow working capital but also want to repay the funds fairly quickly.