Invoice factoring combines funding against unpaid invoices with a service that normally manages the sales ledger and collects customer payments. The provider, also called the factor, advances an agreed proportion of eligible invoices. Your business receives or is credited with the remaining balance after customer payment, less charges and adjustments.
How a factoring arrangement works
After the facility is agreed, you supply invoice information and supporting records. The factor calculates funding availability, applies the agreed limits and provides the collection service. Customer receipts reduce the funded balance. Confirm the payment destination and how receipts appear in your accounts.
For illustration, an eligible £25,000 invoice at an 80% advance supports £20,000 initially, assuming no other deductions. If the customer pays in full and agreed charges total £500, the final balance is £4,500. The example assumes no reserves, existing drawings or credit notes and is not a market quote.
Who speaks to your customers?
With a typical disclosed factoring service, customers know the factor is involved. Agree the introduction, reminder timetable and escalation process. Ask how the provider handles a customer who has a genuine delivery query, rather than simply paying late. Your team still needs to resolve the underlying commercial dispute.
Some products have different disclosure or service arrangements. Obtain the actual specification rather than assuming every factoring facility operates identically.
Factoring versus discounting and CHOCCS
The usual practical difference from invoice discounting is the collection service. Discounting normally leaves credit control with your business. CHOCCS also keeps that work in-house and is commonly offered as a disclosed arrangement. Confidentiality is a separate question from who chases invoices.
Compare service value alongside price
Request an itemised quotation covering funding charges, service fees, minimums, setup, reviews and termination. A larger service fee may include useful work, but ask exactly what is delivered. Do not treat an outsourced collection service as an automatic saving if your own staff costs will continue.
As a planning exercise, record the hours your team spends on routine reminders, payment allocation and dispute resolution. Ask which activities would transfer to the factor and which remain. This gives you a practical basis for comparing a factoring quote with discounting.
Does factoring protect against bad debts?
Not automatically. Under recourse terms, customer non-payment can leave your business responsible for the advance. Non-recourse or bad-debt protection may cover specified risks only. Confirm treatment of insolvency, disputes, credit limits and notification deadlines in writing.
Questions before signing
- Which invoices and customers qualify, and what limits reduce availability?
- Who can agree payment extensions, credit notes and legal recovery?
- What service levels apply to reminders and reporting?
- How are customer complaints and disputed invoices handled?
- What minimum term, notice period and exit charges apply?
- What happens to outstanding invoices when the agreement ends?
Compare proposals using the same ledger and cash forecast. Funding availability and the quality of the collection process both matter.
Sources and verification
Published material checked on 27 October 2026. Provider terms can change; confirm them before applying. Examples and comparison methods are our own illustrations.
