Cash flow, not profitability, is the most common reason growing UK businesses run into difficulty. A business can be profitable on paper and still struggle to pay staff and suppliers if customers are taking 60 or 90 days to settle invoices. Invoice factoring addresses this directly by releasing cash tied up in unpaid invoices, typically within 24 to 48 hours of the invoice being raised. This article explains how factoring works in 2026, how it differs from invoice discounting, and where it fits alongside other forms of working capital finance.
How Invoice Factoring Works
Under a factoring facility, a business sells its outstanding sales invoices to a factoring company, which advances a percentage of the invoice value — usually 80–90% — immediately, with the balance (less fees) paid once the customer settles. Unlike invoice discounting, factoring is typically disclosed: the factoring company manages credit control and collects payment directly from the business’s customers. This makes it well suited to businesses that want to outsource credit control as well as access cash flow, though some businesses prefer a confidential facility where the customer relationship is not visibly affected.
Who Uses Factoring
Factoring is commonly used by manufacturers, wholesalers, recruitment agencies, transport and logistics businesses, and other B2B companies that invoice on credit terms and have a reasonably predictable sales ledger. It tends to suit businesses experiencing growth, seasonal fluctuations, or a period of change (for example a management buyout or restructuring) where traditional overdraft or term lending is harder to access or insufficient for the working capital cycle.
Cost and Structure in 2026
Factoring costs are typically made up of two elements: a service fee (usually 0.5–3% of turnover, covering credit control and administration) and a discount fee charged on the funds drawn, usually set as a margin over the Bank of England base rate. With the base rate held at 3.75% following the July 2026 MPC decision, discount fees on facilities we see in the market are commonly quoted in the range of base rate plus 2–4%, though pricing varies with facility size, debtor quality and sector risk. Facility limits are generally set as a multiple of the sales ledger, and most providers will want credit insurance or bad debt protection built in, particularly where the ledger is concentrated among a small number of customers.
Factoring vs. Invoice Discounting vs. Overdraft
- Factoring — disclosed, factoring company manages collections, generally more accessible to smaller and younger businesses.
- Invoice discounting — confidential, the business retains credit control, typically requires stronger financials and a more established sales ledger.
- Overdraft — more flexible in principle but increasingly difficult for SMEs to access at meaningful limits from mainstream banks, and not directly linked to sales ledger growth.
A key advantage of factoring over a fixed-limit overdraft is that the facility grows with turnover: as sales increase, so does the funding available, without a fresh credit application each time.
What Lenders Look For
Providers will assess the quality and spread of the debtor book, average invoice age and payment history, the sector (some sectors, such as construction, carry additional risk due to retentions and contra charges), and the business’s own financial position. Concentration risk — where one or two customers make up a large share of the ledger — is one of the most common reasons facilities are capped or declined at the level requested.
How Giles Finance Can Help
We work with a panel of factoring and invoice finance providers to place facilities that match the shape of your sales ledger and sector, including businesses that have been declined elsewhere due to ledger concentration or a limited trading history. We can also advise where a blended facility — combining invoice finance with asset finance or a term loan — may suit the business better than a single product.
Invoice factoring and invoice discounting are forms of commercial finance and are not generally regulated by the Financial Conduct Authority. Facility costs, advance rates and fee structures vary by provider and are subject to status and underwriting. Where the tax treatment of factoring arrangements is relevant to your business, you should seek advice from a qualified accountant or tax adviser, as this article does not constitute tax advice.
To discuss whether invoice factoring is right for your business, visit our Invoice Factoring page or contact our team.
Giles Finance is a trading style of Giles Finance & Consultancy Services, authorised and regulated by the Financial Conduct Authority (FRN 726857).