Factoring

Factoring is a form of short-term finance that lets businesses unlock cash tied up in unpaid invoices without waiting for customers to pay. Instead of waiting 30, 60, or even 90 days for payment, a business sells the invoice to a specialist finance company - the factor - which advances most of the invoice value immediately. The factor then collects payment from the customer when the invoice falls due. Factoring is widely used by B2B businesses in construction, promotional merchandise, office furniture, and other trade sectors where extended payment terms are standard.

How Factoring Works

When you raise an invoice and submit it to the factoring company, the factor advances a large percentage of the invoice value - typically within 24 to 48 hours. Once your customer pays the factor directly, you receive the remaining balance minus the factor's fees. Those fees consist of two components: a service charge, which covers administration and credit management, and a discount charge, which is interest on the amount advanced.

Factoring is a disclosed arrangement. Your customer knows a third party is managing the collection of their payment, because they receive payment requests from the factor rather than from you. This distinguishes factoring from invoice discounting, a related product where you retain control of your own credit control and the arrangement remains confidential. Factoring tends to suit businesses that would benefit from having collections managed externally. Invoice discounting suits businesses with established in-house credit control processes and strong customer relationships they want to protect.

When Factoring Makes Sense

Factoring is most valuable for businesses with healthy revenue but slow-paying customers. A roofing contractor waiting 60 days for a main contractor to release payment, or a promotional merchandise distributor invoicing large corporate clients on 45-day terms, can face a significant cash gap even when trading well. Factoring closes that gap by converting outstanding invoices into working capital within days rather than weeks.

It is also used by growing businesses where turnover is rising faster than cash flow. When you are taking on more jobs and ordering more stock, the delay between paying your suppliers and collecting from your customers becomes a real operational constraint. Factoring addresses that constraint without taking on traditional debt, because you are advancing money you have already earned.

The trade-off is cost and disclosure. Factoring fees vary depending on turnover, debtor quality, and the volume of invoices processed. For some businesses, the cost is worth it for the certainty of predictable cash flow. For others, particularly those with strong customer relationships they prefer to manage directly, invoice discounting or other funding options may be a better fit.