Invoice finance
Invoice Factoring for UK Businesses
Invoice factoring lets a business release cash from invoices it has sent to business customers, rather than waiting for them to be paid. The factoring provider usually takes over collecting payment, so your team spends less time chasing invoices.
It’s one of the two main types of Invoice Finance. The key difference from invoice discounting is that with factoring, your customers usually deal with the provider when they pay.
Wize Finance can help your business see whether factoring, or another type of finance, may suit the invoices you’re waiting on.
Share how much you invoice each month and your usual payment terms. The team reviews your enquiry and discusses whether factoring may suit your business.
What is invoice factoring?
Invoice factoring is a type of invoice finance where a business sells its unpaid invoices to a factoring provider. The provider advances an agreed portion of each invoice’s value, usually manages collecting payment from the customer, and releases the balance, less its fees, once the customer pays.
“Debt factoring” is the same thing. It’s an older term for the same arrangement, often used in accounting and business studies. The “debts” are the invoices your customers owe you.
Same arrangement
debt factoring invoice factoring
How invoice factoring works
Exactly how invoices are notified, collected and paid depends on the provider and the agreement.
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1. Invoice
What you do Deliver the work and invoice your business customerWhat the factoring provider usually does Receives a copy of the invoice, or the invoice is assigned to it -
2. Advance
What you do —What the factoring provider usually does Advances an agreed portion of the invoice value -
3. Collection
What you do Carry on serving your customerWhat the factoring provider usually does Manages the sales ledger and collects payment -
4. Payment
What you do —What the factoring provider usually does Receives the customer’s payment -
5. Balance
What you do Receive the balanceWhat the factoring provider usually does Releases the remainder, less agreed fees
What does the factoring provider do?
As well as advancing funds, a factoring provider usually takes on some or all of the work of collecting payment. That can include:
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managing your sales ledger
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sending statements and reminders to customers
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chasing overdue invoices
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in some facilities, checking the credit standing of new customers
For a business without dedicated credit control staff, that service can be part of the appeal. It also means a third party is in contact with your customers, so it’s worth asking how the provider communicates with them.
Will my customers know I’m using factoring?
Usually, yes.
With factoring, customers are normally told to pay the provider, and the provider is the one contacting them about payment. This is often called a disclosed arrangement.
Tell us what you need.
Recourse and non-recourse factoring
- Recourse
Recourse factoring:
if a customer doesn’t pay, your business typically has to repay the advance on that invoice, or replace the invoice with another one. The credit risk stays with you.
- Non-recourse
Non-recourse factoring:
the provider takes on some or all of the risk of approved customers not paying, often through bad-debt protection. It usually costs more and comes with limits: for example, it may only cover named or approved customers, only up to a set amount, or only certain reasons for non-payment.
When invoice factoring may fit
May fit businesses that:
- invoice other businesses on credit terms
- would value help collecting payment
- don’t have, or don’t want to build, an in-house credit control function
- are comfortable with customers dealing with the provider
May fit less well where:
- you want customers to be unaware of the arrangement (see Invoice Discounting)
- you’d rather keep full control of how customers are contacted
- you need funding that isn’t linked to invoices (see Working Capital Loans)
What to check before you agree
Invoice factoring FAQs
What is debt factoring?
Debt factoring is another name for invoice factoring. A business sells its unpaid invoices (the debts its customers owe) to a factoring provider, which advances part of their value and usually collects payment from the customers.
Is invoice factoring the same as invoice finance?
Invoice factoring is one type of invoice finance. Invoice finance is the umbrella term, which also includes invoice discounting and single-invoice funding.
Do I still have to deal with late-paying customers?
With factoring, the provider usually handles chasing payment. Under a recourse arrangement, though, if a customer doesn’t pay in the end, your business typically still carries that risk.
Can I choose which invoices to factor?
Some providers offer selective or single-invoice factoring, sometimes called spot factoring. Others expect you to factor all your invoices, or all invoices to particular customers. It depends on the facility.
What happens to my customer relationships?
The provider usually contacts customers about payment, so it’s worth asking how it communicates and how disputes are handled. You still deliver the work and manage the relationship day to day.
Want help collecting what you’re owed?
Tell us about your customers, your payment terms and how much you have outstanding. Wize Finance can then help you see whether factoring or another type of finance may suit your business.
- your customers
- your payment terms
- how much you have outstanding