What is Factoring? The Complete Guide for Businesses
What is Factoring?
Factoring is the broad term used to describe the process involved in invoice finance where a business sells its outstanding customer invoices to a factoring company. In return, the lender gives you a big chunk of the invoice value up front (usually between 70–95%). Instead of waiting 30, 60, or even 90 days for customers to pay, you can access the cash tied up in your invoices immediately.
What Types of Factoring are There?
Invoice Factoring
Invoice factoring (also known as debt factoring) is a finance solution where you sell your outstanding invoices to a factoring company. The factoring company then takes charge of collecting payment directly from your customers, a process known as credit control. This allows you to focus on other areas of your business whilst the factoring company chases your invoices.
Invoice Discounting
Invoice discounting is another way to unlock cash tied up in unpaid invoices, but the key difference is you retain control over your sales ledger and collections process. This means that the process is strictly confidential and doesn’t notify your customers. Discounting is a great choice for those who already have internal credit control tools in use, allowing them to keep their financial operations discreet.
Reverse Factoring
Reverse factoring (also known as supply chain finance) is a solution where a finance company pays your suppliers on your behalf, often before your payment terms are due. This allows suppliers to access cash early while you, as the buyer, can extend your payment terms and manage cashflow more efficiently. It’s a solution that supports supplier relationships and helps businesses optimise working capital.
Spot Factoring
Spot factoring, sometimes called single invoice factoring or selective invoice finance, is a flexible version of invoice factoring where you choose individual invoices to finance rather than committing your entire sales ledger.
How Factoring Works
While there are variations, the factoring process usually follows a straightforward path:
- You raise an invoice for goods or services delivered.
- You notify the factoring company about the new invoice.
- The provider advances up to 90% of the invoice value within 24 hours.
- If you choose, the factoring company manages payment collection from your customer.
- Once your customer pays, the remaining balance is released to you, minus factoring fees.
Advantages and Disadvantages
of Invoice Factoring
Advantages
Accelerate your business growth
Invoice factoring gives you quick access to working capital. That means you can take on new contracts, invest in equipment, hire staff, or boost production without waiting for customer payments to arrive. It can help you innovate and grow at a faster rate.
Support cashflow
Instead of being held back by 30, 60, or 90-day payment terms, you can access up to 90% of your invoice value almost immediately. This ensures you can meet ongoing expenses such as payroll, rent, and supplier costs without disruption.
Supports key customer relationships
Invoice Finance removes the strain of late payments. By giving you access to funds upfront instead of waiting, it reduces the risk of customer relationships being damaged by payment delays.
Disadvantages
Cost of factoring
Although factoring keeps your cash flow healthy, it is not a free service. There are a few costs which may lower your business profit margins including service fees and interest.
Customer dependence
Depending on the terms set by your lender, you may be held responsible if your customer fails to settle their invoice. Many invoice finance providers offer forms of bad debt protection that can sit alongside an invoice finance facility, which can help minimise disruption if your company suffers a bad debt.
What Types of Businesses Benefit from Factoring?
Factoring is particularly valuable for:
- SMEs and small businesses with limited cash reserves
- Companies with long payment terms or slow-paying clients
- High-growth businesses needing regular working capital
- Sectors with recurring invoices, such as recruitment, manufacturing, and transport
- Businesses going through an insolvency or restructure
- Companies going through a management buy-in or buyout
Conclusion
Factoring is a practical way for businesses to unlock cash tied up in unpaid invoices. Whether you choose debt factoring, discounting, spot factoring or reverse factoring, the right solution can ease cash flow pressures, reduce credit risk, and save time chasing payments.
At Time Finance, we offer both invoice factoring and discounting solutions to businesses and intermediaries across the UK. Our Invoice Finance solutions help businesses access up to 90% of the value of their unpaid invoices within 24 hours of them being raised. Contact our business development team to get started with an invoice finance solution.