What is invoice factoring, exactly?
The mechanics, the money and the fee anatomy behind the UK's most-used form of invoice finance, explained from first principles.
1.How it actually works
You keep invoicing customers exactly as you do now, on your normal 30 to 90-day terms. Each invoice is submitted to the funding partner, who advances the agreed percentage, typically within 24 to 48 hours. From that point, the funding partner owns collections on that invoice: they run credit checks, send statements and chase late payment, usually under their own name or a joint name with yours. When the customer pays, the funding partner releases the held-back balance to you, minus the service fee and discount fee that make up the facility's cost.
2.Worked example
A business invoicing £85,000 a month on 60-day terms, factoring at an 85% advance rate:
Factoring buys you two things at once: money now, and a credit-control team you did not have to hire.
3.What makes up the cost
Two charges drive the cost of most facilities. The service fee covers credit control, collections and sales-ledger administration; the discount fee is the interest-like cost of the funds you have drawn, usually quoted as a margin over base rate.
Illustrative split of a factoring facility's total cost. Service fee: credit control and admin. Discount fee: the cost of funds drawn. Extras: fees some providers add, worth screening for before you sign.
- Minimum monthly usage charges applied even in months you did not draw funds
- CHAPS or same-day transfer fees added on top of the advance
- Annual audit fees for reviewing your sales ledger
- Auto-renewing contract terms with an early-exit penalty
- Concentration limits that cap funding once one customer passes a set share of your book
See what invoice finance actually costs for the full fair-range vs red-flag breakdown across every fee type.
4.Who it suits
- No dedicated credit-control or collections team in-house
- Fast-growing companies adding new B2B customers regularly
- Turnover from roughly £50,000 a year on 30–90-day terms
- Comfortable with customers seeing a funding partner on statements
- You need collections to stay invisible to customers, see discounting instead
- You sell to consumers or invoice on immediate/COD terms
- You only ever need to fund one invoice occasionally, see selective invoice finance
- You already run a strong in-house credit-control process you would rather keep
Frequently asked questions
You issue an invoice, a funding partner advances most of its value within a day or two, then collects payment directly from your customer and pays you the rest, minus their fee, once the customer settles.
No. A loan is a fixed sum repaid on a schedule regardless of what your customers do. Factoring advances against sales you have already made, so the facility grows and shrinks with your invoicing rather than sitting on your books as fixed debt.
The funding partner takes over collections, which is the entire mechanism that makes factoring work without you needing your own credit-control team. If keeping collections invisible to customers matters more than that trade-off, invoice discounting keeps you in the collecting seat instead.
Once a funding partner has your invoice book, bank statements and Companies House details, a first facility typically completes within a few working days. After that, funds against new invoices usually release within 24 to 48 hours of you raising them.
Two minutes, soft checks only, no impact on your credit score.
See how much you could releaseLast reviewed: August 2026
See how much you could release.
Two minutes, soft checks only, no impact on your credit score.