Invoice Factoring Explained: How It Works, Costs, and Pros & Cons

Invoice factoring is a form of invoice finance where a specialist lender advances you cash against your unpaid invoices and takes over the management of your sales ledger — chasing payment from your customers on your behalf. It is one of the most widely used cashflow solutions for UK SMEs, particularly businesses in manufacturing, recruitment, transport, and professional services that invoice other businesses on credit terms.

1. 1You raise an invoice to your customer and submit it to your factoring company.
2. 2The factoring company advances you up to 90% of the invoice value — typically within 24 hours.
3. 3The factoring company manages your sales ledger and chases payment from your customer.
4. 4When your customer pays, the factoring company releases the remaining balance (10%) minus their fees.

Because the factoring company contacts your customers directly to collect payment, factoring is a 'disclosed' arrangement — your customers will know you are using a factoring facility. This is an important distinction from invoice discounting, where the arrangement remains confidential.

For a business turning over £1m, the total annual cost of a factoring facility might be £15,000–£30,000. However, this needs to be weighed against the value of the working capital released (up to £90,000 if you have £100,000 in outstanding invoices) and the cost of running an in-house credit control function.

• Immediate access to cash: up to 90% of invoice value within 24 hours of raising an invoice.
• Outsourced credit control: the factoring company chases payment, freeing up your time and reducing the need for in-house credit control staff.
• Scales with your business: the facility grows automatically as your turnover grows — unlike a fixed overdraft limit.
• No fixed assets required: secured against your invoices rather than property or personal guarantees.
• Bad debt protection: many factoring facilities include credit insurance, protecting you if a customer becomes insolvent.
• Accessible to growing businesses: available to businesses from around £100,000 turnover, including those with limited credit history.

• Disclosed to customers: your customers will know you are using a factoring facility, which some businesses prefer to avoid.
• Cost: more expensive than a bank overdraft in absolute terms, though it releases significantly more working capital.
• Minimum contract periods: most factoring agreements have a minimum term of 12 months.
• Quality of credit control matters: the factoring company's approach to chasing your customers will reflect on your business — choose a lender with a professional collections team.
• Not suitable for B2C businesses: factoring is designed for businesses that invoice other businesses or public sector organisations.

Using an independent broker like Amber Finance means you can compare terms from the full market rather than being limited to a single lender's offering. We assess your requirements, approach the most suitable lenders, and present you with competitive quotes — at no cost to you.

• Advance rate: the percentage of invoice value advanced upfront — typically 80%–90%.
• Concentration limits: some lenders limit the proportion of your ledger that can be from a single customer.
• Minimum annual fee: a floor on the service charge regardless of turnover.
• Notice period: how much notice is required to exit the facility — typically 3–6 months.
• Bad debt protection: whether credit insurance is included and what the excess/limit is.
• Recourse vs non-recourse: recourse factoring means you are liable if a customer does not pay; non-recourse factoring transfers this risk to the lender.