Factoring Finance Explained

Factoring - The Basics

Most of the cash you have tied up in your business will be in unpaid customer invoices. You can turn these invoices into cash quickly by Factoring them.

Imagine taking all that customer debt over 60 days old and converting it into usable cashflow now? What could you do with that extra cash?

Factoring is a well established method of getting cash now against invoices due for payment later.
Factoring involves the finance provider managing your sales ledger, credit control and payment collection.
Whilst this means someone else will take care of the time, resources and cost of chasing in your invoices, it does mean that your customers will know you are using factoring; if that matters at all.

It’s possible to organise things so that you can still do the chasing for collection of your invoices. That way, your clients won’t know you’re using a Factoring company. This is known as Confidential Factoring and whilst it gives you the best of both worlds, if you expect to be left in charge of collecting payments on your own invoices, there’ll be a lot of disclosure and communication between you and the Factoring Company to ensure you’re doing everything you should be.

InterFinancial Limited is a UK based independent broker, working with a number of lenders. This provides us with access to a range of independent market information allowing us to find you the best option that’s available now.

How Factoring Works

When you issue new sales invoices, they will carry a notification that they should be paid to the Factoring Company and you’ll send a copy of the invoice to both your customer and the finance provider. The finance provider will then make a pre-arranged advance of the invoice value (at the agreed percentage) available to you, typically within 1-2 days.

The finance provider will generally manage your sales ledger, chasing and collecting payments. Once the lender has collected payment they will pass back any money owed to you less their fees.

Be warned though, if a customer fails to pay or goes bust then the finance provider will normally deduct back any advance they previously made for that customer against any new advances you’re expecting. Ask about insuring your sales ledger.

Credit Limit Checking

As part of the Factoring process, your customers will be assessed by the finance company for credit limits.
Don’t worry though, you’ll be able to finance most of your customers to some degree, even brand new customers without any trading history.


You make a sale for £100 + VAT = £120.

You report the sale to the Factoring Company and they advance you (say) £80 within a couple of days. (Note that you now owe the Factoring Company £80)

The Factoring company chases in your customers invoice.

Once your customer pays the invoice, the Factoring Company passes you the remaining £40 less their fees.

Factoring Pros

  • Gives you instant access to cash for sales made on customers on credit terms.
  • No security required to secure the funding.
  • Flexible form of lending allowing you to borrow as much or as little as you like up to the limits agreed against your customer ledger.
  • Eliminates the time and money spent on credit control and chasing payment from customers.
  • As well as an additional source of finance, Factoring can also provide excellent strategic advice to help grow your business.
  • Can be operated as a confidential service so your customers don’t need to know you use the service.

Factoring Cons

  • There is a cost, so your profit will be reduced.
  • You may not be able to use your customer ledger as security for other sources of finance.
  • You may not be able to borrow the full amount against poor quality customers.
  • To end the Factoring arrangement, you’ll need to pay the finance company in full with either a new Factoring arrangement or a business loan so this will need planning.
  • How the Factoring company deals with your clients (chasing money can be a sensitive subject) may affect your relationship with your customers. You can’t expect to be advance funds from clients who never pay their bills so you can’t expect the Factoring Company to be nice all the time!
  • Factoring is a little more expensive than Invoice Discounting because the finance company has to cover the cost of collecting payment of your invoices.

Is Factoring right for your business? It could be if:

  • You’re an organisation in the UK dealing in business to business sales.
  • You have a projected annual turnover of at least £50,000; and
  • You issue invoices with credit terms of between 30 and 90 days.

How much does Factoring cost?

The cost of Factoring is driven mainly by the finance company’s service fee, this is an agreed percentage of the cash you draw from the provider. Their fee may depend on things like the types (quality) of businesses you’re selling to.

Helping you find the best deal for your business

Our aim at InterFinancial Limited is simple, to save you time and money by putting you in touch with the right finance provider offering the right solution for you and your business.

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