Invoice Factoring

What it is

With a factoring facility, you assign your invoices to the finance provider. They advance an agreed proportion of the value to you, then take responsibility for collecting payment from your customer when the invoice falls due. Once payment is received, the balance is passed to you less their fees.

Because the provider is dealing directly with your customers, factoring is normally a disclosed arrangement: your customers will be aware that payment should be made to the provider. For many businesses that is entirely acceptable, and a professionally run collections process can improve payment behaviour.

Factoring is often the first form of invoice finance a growing business encounters, partly because providers may be more comfortable offering it where in-house credit control is limited.

How it works

• Invoice your customer

  You raise the invoice as normal, with a notice that payment is to be made to the finance provider.

• Receive an advance

  The provider makes an agreed proportion of the invoice value available to you.

• The provider collects

  Their credit control team follows up with your customer and collects payment when due.

• Balance released

  Once your customer has paid, the remaining value is released to you, less the service fee and discount charge.

Who it tends to suit

• Businesses without the time or staff to run credit control
• Companies whose customers routinely pay late
• Owner-managed firms that want to focus on operations rather than chasing
• Businesses whose own credit control has become a barrier to funding
• Sectors such as recruitment, manufacturing, haulage and wholesale

Advantages and considerations

Common questions

• What is the difference between recourse and non-recourse factoring?

  With recourse factoring, if a customer fails to pay you remain responsible for the debt. With non-recourse factoring, the provider takes on the risk of customer insolvency within agreed limits, usually for an additional fee. Which is appropriate depends on your debtor book and your appetite for risk.

• Will factoring damage my customer relationships?

  Not usually. Established providers run collections in a professional manner and factoring is a widely understood arrangement in UK business. That said, it is reasonable to ask how a provider handles collections and what say you have over particular accounts before you commit.

• Do I have to factor every invoice?

  A traditional whole-ledger facility covers all of your eligible invoices. If you only want to fund particular invoices or customers, a selective facility may suit you better.

• What happens if a customer disputes an invoice?

  Disputed invoices are typically excluded from funding until the dispute is resolved. Providers will usually work with you to resolve queries, but clear invoicing and good records reduce the chance of disputes arising.