Table of Contents
Key Takeaways
- What Is an Invoice?
- What Is Invoice Factoring?
- How Does Invoice Factoring Work?
- Why Do Businesses Use Invoice Factoring?
- Who Uses Invoice Factoring?
- What Are the Benefits of Invoice Factoring?
- What Are the Downsides?
- What Is the Difference Between Factoring and Discounting?
- How Much Does Invoice Factoring Cost?
- When Should You Use Invoice Factoring?
- How to Start Using Invoice Factoring
- Final Thoughts
- FAQ’s
Key Takeaways
- Invoice factoring helps businesses get paid faster by turning unpaid invoices into cash.
- It is not a loan. You are not borrowing money or adding debt.
- You usually get most of the invoice value upfront—often 70% to 90%.
- The factoring company collects payment from your customer when the invoice is due.
- The service includes a fee, usually between 1% and 5% of the invoice amount.
- Invoice factoring is used by many industries that wait weeks or months for payment.
1. What Is an Invoice?
When you are running a business or in most businesses in general, it is not expected for your customers to pay in cash or to pay right away. You may not realise it, but some businesses thrive on the majority of their income being through invoices. But what is an invoice?
An invoice is a document that specifies the amount a customer needs to pay within a number of days. This can range from 30 days to 60, sometimes longer if it is fair for both parties and both agree to it.
Example:
You run a painting company and you paint someone’s office for €5,000, you then send them an invoice saying they have 30 days to pay absent other agreement terms. This means you did the work, but the money isn’t in your bank account yet. You have to wait.
Sometimes you cannot wait, especially if your business needs money now to buy supplies, pay workers, or take on new jobs. But, there is a way to get the money without having to wait. That is where Invoice Factoring comes in.
2. What Is Invoice Factoring?
Invoice factoring is a way to get money from your invoices before your customer pays you. Instead of waiting, you sell the invoice to a special company called a factoring company. This company gives you most of the money right away. Later, when your customer pays the invoice, the factoring company gives you the rest—minus a small fee.
Think of it like this: the factoring company is helping you turn “money owed” into “money in the bank” without waiting.
So, if you have an invoice worth €10,000, the factoring company might give you €8,500 upfront. Once your customer pays the full €10,000 to the factoring company, they will give you the last bit—say €1,000—after keeping a €500 fee.
This helps businesses avoid cash flow problems and get paid faster.
3. How Does Invoice Factoring Work?
- You send an invoice to your customer after doing work or delivering goods.
- You give that invoice to a factoring company. This can be done through a simple application process.
- The factoring company gives you most of the money right away. This is often 70% to 90% of the invoice value.
- The factoring company collects the payment from your customer when it’s due.
- You receive the rest of your money, minus the fee, after your customer pays.
This process is usually very fast. Once you’re set up with a factoring company, you can get your cash within 24 to 48 hours of sending the invoice.
4. Why Do Businesses Use Invoice Factoring?
One of the biggest reasons businesses use invoice factoring is because they need money quickly. When customers take a long time to pay, it can create a problem. You might be doing lots of work, but you still don’t have money in your account. This is called a cash flow problem.
Other reasons to use invoice factoring include:
- Paying rent, salaries, or suppliers on time
- Taking on a new project that needs upfront spending
- Avoiding bank loans or credit card debt
- Saving time chasing late payments
5. Who Uses Invoice Factoring?
Many different types of businesses use invoice factoring. It is especially helpful for small and medium businesses that don’t have a lot of extra cash lying around.
General Rules for Eligibility
To be approved for invoice factoring, most businesses need to meet some basic requirements:
- Business Type: Whether you run a limited company, a partnership, or you’re a sole trader, many business structures are usually accepted.
- Sales Amount: Some factoring companies want to see that your business earns a certain amount each year—usually starting around £50,000 or more in annual sales.
- B2B Sales: Your business should MOSTLY sell to other businesses (this is called B2B), not directly to everyday customers.
- High Turnover: A good turnover ratio history helps. Factoring companies want to know that your customers are likely to pay on time.
- Valid Invoices: Only certain invoices can be factored. The invoices should be real, unpaid, and not already promised to another lender or factoring company.
Industries That Often Qualify
Some types of businesses are especially good candidates for invoice factoring. This includes businesses that:
- Have Long Payment Cycles: Companies in industries like freight, construction, healthcare, or manufacturing often deal with payment delays. Factoring helps them get paid faster.
- Are Growing Fast: A business that is expanding quickly might need extra cash to keep up. Factoring helps bridge the gap between doing the work and getting paid.
- Struggle with Late Payments: If customers often take a long time to pay, invoice factoring can bring in cash sooner so you’re not left waiting.
What Could Prevent a Business from Qualifying?
Some things may stop a business from being able to use invoice factoring. These include:
- No Formal Invoices: If your business doesn’t send proper, official invoices, they may not be accepted.
- Already-Factored Invoices: You can’t factor the same invoice more than once.
- Active Bankruptcy: If your business is currently going through bankruptcy, it might not be approved.
- Risky Customer Base: If most of your customers have poor credit or a history of paying late, the factoring company might not want to take the risk.
- Trucking and freight companies
- Construction and building services
- Cleaning and janitorial businesses
- Temporary staffing agencies
- Manufacturing and wholesale companies
- Marketing or creative agencies
These businesses often deal with large invoices and slow-paying customers. Invoice factoring helps them keep moving forward while they wait to be paid.
6. What Are the Benefits of Invoice Factoring?
There are many benefits to using invoice factoring. Here are the biggest ones:
Faster Access to Cash
You don’t have to wait 30, 60, or even 90 days to get paid. You can get most of your money in just a day or two.
Better Cash Flow
Having money on hand makes it easier to pay your bills and keep your business running smoothly.
No Loans or Interest
This is not a loan. You’re not borrowing money. You are simply getting your money sooner, without adding debt.
Growth Opportunities
When you have access to cash, you can take on bigger jobs, hire more people, or buy more supplies.
Help with Collections
Some factoring companies handle the job of collecting payment from your customers, which saves you time and effort.
7. What Are the Downsides?
Although invoice factoring can be very helpful, there are a few downsides to think about:
Cost
You do have to pay a fee, which is usually between 1% and 5% of the invoice amount. This means you won’t get every dollar, but many businesses think the fast cash is worth it.
Customer Involvement
Since the factoring company collects the payment, your customers will know you are using this service.
Not All Invoices Qualify
If your customer has bad credit or doesn’t pay on time, the factoring company might not accept the invoice.
8. What Is the Difference Between Factoring and Discounting?
Both invoice factoring and invoice discounting help you get cash from unpaid invoices. But they work in different ways.
With factoring, the factoring company handles everything—including collecting payment from your customer. Your customer will know that you’re using a factoring service.
With discounting, you still collect the payment yourself. Your customer may not even know that a third-party company is involved. This keeps things more private, but it often requires stronger financial records.
Factoring is more common for small and mid-sized businesses. Discounting is usually used by bigger companies.
9. How Much Does Invoice Factoring Cost?
The cost of invoice factoring depends on a few things:
- The size of the invoice
- How long your customer takes to pay
- Your industry
- Your customer’s credit history
Most fees range from 1% to 5% of the invoice total. For example, if your invoice is €10,000 and the fee is 3%, the factoring company keeps €300, and you get the other €9,700 (split between the upfront payment and the remainder after your customer pays).
Some companies also charge setup fees or monthly minimums, so it’s important to read the terms before you sign up.
10. When Should You Use Invoice Factoring?
You should think about using invoice factoring if:
- Your customers take a long time to pay
- You need cash to cover your day-to-day business expenses
- You want to grow your business but need working capital
- You don’t want to take on more loans
- You spend a lot of time chasing down late payments
Invoice factoring is not right for every situation, but it can be a great tool when used at the right time.
11. How to Start Using Invoice Factoring
Getting started is usually simple. Here’s how it works:
- Choose a factoring company. Look for one with good reviews (you can search them through Google and look at their Google My Business Profile or their socials) and experience in your industry.
- Apply and share your invoices. You’ll need to give some details about your business and your customers.
- Get approved. This can take a few days the first time, but faster afterward.
- Receive your cash. Once approved, you’ll get your money in 1–2 business days.
- Let the company collect. The factoring company will follow up with your customer when payment is due.
Once the invoice is paid, you’ll get the rest of the money, minus the fee.
12. What Happens If the Customer Doesn’t Pay the Invoice?
If your customer doesn’t pay the invoice, what happens next depends on the type of factoring you chose:
1. Recourse Factoring
- You are still responsible if the customer doesn’t pay.
- The factoring company can ask you to pay the money back.
- You may need to cover the loss or replace the unpaid invoice with a new one.
2. Non-Recourse Factoring
- The factoring company takes the risk.
- If the customer doesn’t pay, you don’t have to pay the money back.
- But this kind of factoring usually costs more.
13. Final Thoughts
If you are considering getting invoice factoring, then you are in the position where either you as a business owner do not want other assets as collateral to access more money, or you do not want to wait longer. But seeing you have a lot of invoices still needing to be claimed and you need money right away, then this option is the right decision for you.
It may not be the solution to all of your problems but for businesses of all sizes, invoice factoring is definitely one of the many ways to get paid faster and keep things running smoothly.
Frequently Asked Questions (FAQ)
1. Is invoice factoring a loan?
No. Invoice factoring is not a loan. You are getting money early from invoices you already sent to your customers.
2. Will my customers know I am using invoice factoring?
Yes. The factoring company usually tells your customers to pay them instead of you.
3. How fast do I get the money?
Within 24-48 hours.
4. Can small businesses use invoice factoring?
Yes.
