Invoice Finance vs Factoring

Invoice finance is an umbrella term for any funding arrangement where a business borrows money against unpaid invoices. Rather than waiting 30, 60, or 90 days for customers to pay, the business receives an advance - typically 70% to 90% of the invoice value - from a finance provider within 24 to 48 hours of raising the invoice.

When the customer pays, the finance provider releases the remaining balance minus fees. The two main forms of invoice finance are factoring and invoice discounting.

Both products unlock cash tied up in the sales ledger, but they differ significantly in how the customer relationship is managed and who handles credit control.

With factoring, the finance provider takes control of your sales ledger and manages credit control on your behalf. Your customers are notified that their invoices have been assigned to the factoring company and are instructed to pay the factor directly.

This means the factoring company chases late payments, manages collections, and handles debtor queries. For businesses without a dedicated credit control function, this can be a significant benefit - it frees up time and reduces the risk of late payment.

However, because customers know a third party is involved, factoring is a disclosed arrangement. Some businesses prefer to avoid this because they feel it may affect how customers perceive their financial position.

Key features of factoring

• The factor manages credit control and collections
• Customers are notified and pay the factor directly
• Typically available to smaller businesses or those without a credit control team
• Advance rates usually range from 70% to 85% of invoice value
• Fees include a service charge (0.5% to 3% of turnover) plus a discount charge on funds drawn

Invoice discounting works on the same principle - you borrow against unpaid invoices - but the business retains control of its own credit control. Customers are typically unaware that a finance provider is involved, making invoice discounting a confidential arrangement.

The business continues to send invoices under its own name, chase payments, and manage the customer relationship. The finance provider monitors the sales ledger and verifies invoices but does not interact with customers.

Invoice discounting is generally suited to more established businesses with a robust credit control function and a proven trading history. Lenders often require minimum annual turnover thresholds (commonly £500,000 or more) before offering this product.

Key features of invoice discounting

• The business retains credit control and manages collections
• Customers are not notified - the arrangement is confidential
• Typically requires a proven credit control process and trading history
• Advance rates can be higher, usually 80% to 90%
• Service charges tend to be lower because the lender does less work

Both products typically involve two cost components:

• Service charge - a percentage of turnover that covers administration, credit management (in factoring), and platform access
• Discount charge - interest on the money advanced, usually calculated daily on the amount drawn and charged at a margin over base rate

Factoring tends to carry higher service charges because the factor provides credit control. Invoice discounting has lower service charges but requires the business to bear the cost of its own credit management function.

Use the Invoice Finance Calculator or Factoring Cost Calculator to model costs for your business.

The right choice depends on your business size, credit control capability, and how you want your customer relationships managed.

Choose factoring if:

• You are a smaller business or start-up without a dedicated credit control team
• You want help managing collections and chasing late payers
• You are comfortable with customers knowing a third party is involved
• You want the option of bad debt protection (non-recourse factoring)

Choose invoice discounting if:

• You have an established credit control function and want to maintain it
• Confidentiality matters - you prefer customers not to know about the arrangement
• Your annual turnover is above £500,000 and you have a proven track record
• You want higher advance rates and lower service charges

According to Spark Intel's analysis of Companies House charge registrations, the UK invoice finance market has evolved significantly over the past three years. While traditional banks (Lloyds, HSBC, Barclays) continue to dominate by volume, mid-tier independents and specialist providers have gained market share - particularly in the factoring segment where they serve smaller businesses that banks often decline.

For the latest market data, see the monthly invoice finance reports or the State of UK Invoice Finance synthesis.