Invoice factoring

Last updated on 10 August 2023

Are you a UK business owner seeking to access quick capital without taking out a traditional loan? Invoice factoring could be the answer for you.

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It is an innovative finance tool used by businesses of all sizes, and it helps them to unlock funds that are tied up in unpaid invoices.

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Best invoice factoring companies

Factoring companyAdvance rate (max)Eligibility

Bibby Financial Services

90%Annual turnover over £100,000

Close Brothers Invoice Finance

90%Projected turnover above £500,000

Creative Capital

92%None

eCapital Factoring

96%

IGF Commercial Finance

90%None

Kriya

90%Must be a limited company with turnover of £250,000

Novuna invoice finance

85%Annual turnover above £50,000 (recommended)

Nucleus Commercial Finance

85%None

Previse

90%Trading for 12 months minimum

Pulse Cashflow Finance

90%None

Skipton Business Finance

90%To £30 million

Team Factors

90%None

Time Finance Plc

90%None
Best invoice factoring companies compared

What is invoice factoring?

Invoice factoring is a financial arrangement where a business sells its outstanding invoices to a third-party service provider. The service provider gives the business an advance on the invoice amount and then collects payment from the customer when it’s due. This helps businesses access cash quickly without having to wait for customers to pay their overdue invoices.

This type of business borrowing can also help to manage cash flow and allow businesses to take on larger orders or expand their operations. It is a flexible service, as the provider will tailor the arrangement to meet individual businesses’ needs.

How does invoice factoring work?

Invoice factoring works by transferring the rights of an invoice from a business to a service provider. The service provider advances a percentage (usually around 70-90%) of the value of the invoices to the business and then collects payment directly from customers when they are due.

When the customer pays, minus any fees or charges, the remaining balance is paid to the business.

This process helps to ensure that businesses have access to cash quickly, even if customers are slow in paying. The invoice factoring company will typically transfer the funds quickly into the receiving business bank account.

This type of borrowing can also help small businesses manage their cash flow more effectively and take advantage of new opportunities without having to wait for payment.

What is the difference between invoice discounting and factoring?

Invoice discounting is similar to invoice factoring in that it allows businesses to access cash quickly by selling off outstanding invoices (receivables).

However, with invoice discounting the business is responsible for collecting payment from customers and then remitting the balance back to the service provider minus any fees or charges.

Invoice discounting does not offer the same level of protection that factoring does, as the business is still responsible for collecting payment.

Invoice discounting tends to be more suitable for larger businesses with more established customer relationships and stronger collections processes. With invoice factoring, the service provider takes care of all aspects of the collection process.

How much does invoice factoring cost?

The cost of invoice factoring can vary depending on the service provider and the individual agreement. Generally, businesses will pay a set fee for each invoice they send to the service provider. This fee is typically between 1% to 5%.

In addition, businesses may also be charged interest or additional fees if invoices are not paid on time. The service provider will also usually charge an annual fee or a minimum number of fees each month.

It’s important to carefully compare the costs and terms of different providers before deciding which one is right for your business.

What documents are needed for invoice factoring?

In order to set up an agreement, businesses will usually need to provide the following documents:

  • Company registration certificates
  • Financial statements from the past three years
  • Bank references
  • A list of customers and their associated invoices/credit limits
  • Business plans and/or projections
  • Proof of ownership and/or any security that is being offered
  • Contracts, invoices and other documents related to the sale of goods or services

The specific documents required will vary from provider to provider, so it’s essential to check what is needed before setting up an agreement.

How to choose an invoice factoring company?

When choosing a company, it’s important to consider a number of factors. Firstly, you need to decide whether the provider is suited to your particular business needs, taking into account the size and nature of your business. You should also check that they have a good reputation and are able to provide all of the services that you require.

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