Invoice Finance vs Factoring: What UK Businesses Need to Know

Priya runs a small engineering firm in Coventry. Last March she won the biggest order of her life — and nearly went under because of it. The parts had to be bought and the staff had to be paid, but the invoice sat unpaid for sixty days. She had never been more successful, or closer to running out of money. That gap is why thousands of British firms look at invoice finance vs factoring every year, and why getting the choice right matters so much.

Quick comparison	Factoring	Invoice discounting
Who chases payment	The provider	You do
Do customers know?	Yes — it is disclosed	No — it is confidential
Service fee	0.5% – 3% of invoice value	0.3% – 0.5%
Cash up front	70% – 90%	70% – 90%
UK businesses using it	About 9,900	About 30,200
Usually suits	Smaller or fast-growing firms	Turnover above about £500,000

The question nearly everyone asks the wrong way round

Here is the first thing worth clearing up, because it trips up almost everybody. Invoice finance is not a rival to factoring — it is the family name. Any borrowing raised against unpaid invoices counts as invoice finance, and factoring is simply one member of that family. The other is invoice discounting. So when Priya typed “invoice finance vs factoring” into her phone at eleven at night, the question she actually needed answering was factoring or discounting. Both hand you most of an invoice’s value straight away. The real difference is who chases your customer for the money, and whether that customer ever finds out a lender is involved. Everything else follows from those two points, so it is worth being sure which one you are being sold.

Factoring: someone else does the chasing

With factoring, you hand the whole job over. You raise the invoice, send a copy to the provider, and usually within a day or two you receive most of its value — commonly 80% to 90%, with 85% the figure quoted most often. From that moment the provider owns the chasing. They send the reminders, they make the phone calls, and your customer pays them rather than you. When the money lands you get the rest, minus the fees. For Priya, whose evenings were disappearing into polite emails about overdue payments, that was the appeal. Around 9,900 UK businesses use factoring, and they tend to be smaller firms or fast-growing ones with no dedicated credit control person. The trade is that your customers know, because the arrangement is disclosed.

Invoice discounting: nobody needs to know

Invoice discounting works the same way at the front end and completely differently at the back. You still get most of the invoice value up front, but you carry on running your own sales ledger. You send the reminders, your customer pays you as normal, and you settle up with the provider afterwards. They never appear in the relationship at all, which is why it is called confidential. This is the quieter, cheaper option and, despite getting far less attention, it is the more popular one by some distance — roughly 30,200 UK businesses use it, about three times the number who factor. The catch is that providers only offer it to firms that already chase payment well, which usually means decent systems and turnover comfortably above £500,000.

What it actually costs, and why 2% is not 2%

You are charged twice, and only one of the charges is obvious. First comes the service fee for running the facility: roughly 0.5% to 3% of invoice value for factoring, and a much lower 0.3% to 0.5% for discounting, because you are doing the admin yourself. Then comes the discount charge, which is simply interest on the money advanced, typically 1.5% to 3% above base rate, worked out daily and billed monthly. Now the part that catches people out. A 2% fee on an invoice paid in thirty days is not 2% a year — it is closer to 24%. Most facilities land somewhere between 15% and 30% a year once everything is counted, against roughly 5% to 15% on an ordinary business loan or overdraft.

The charges that are never in the headline rate

The quote you are shown and the amount you pay are rarely the same number, and the difference lives in the contract. Expect an arrangement fee to set the facility up, usually 1% to 2% of the limit or somewhere between £300 and £1,500. Expect a minimum monthly charge too, often £500 to £1,000, payable in quiet months whether you use the facility or not. Many providers also charge for a periodic audit of your books. Then there is the exit. Notice periods run from one to three months and three is common, while leaving early can cost 1% to 3% of your expected remaining volume, or three to six months of service charges. Read that section before you sign, not afterwards — it is worth having your accountant look over it too.

Recourse or non-recourse: who loses if the customer goes under

This single word decides who carries the risk, and it is the one Priya had never heard of. Most facilities are “with recourse”, which is the cheaper arrangement. If your customer does not pay within an agreed window, you buy the invoice back or the provider simply takes the advance off your next payment. The credit risk stayed with you the whole time. “Non-recourse” moves that risk across, so the provider absorbs the loss if your customer becomes insolvent. It costs more, and the protection is narrower than it sounds — it normally covers insolvency only, with caps, and excludes invoices in dispute or simply paid late. It is not general bad-debt insurance, however it is described.

Nobody regulates this, so check who you are dealing with

Here is the fact most guides leave out entirely. Invoice finance and asset-based lending are exempt from Financial Conduct Authority regulation, because these are business-to-business products. The protections people assume exist simply are not there. What stands in their place is UK Finance’s Standards Framework, with a code of conduct and an independent complaints process — but it only binds providers who are UK Finance members, so ask before you sign. One more thing deserves saying plainly: directors are often asked for a personal guarantee, sometimes secured against their home. On a recourse facility, a customer’s collapse can therefore reach your own front door.

So which one should you actually pick?

Be honest about two things: your size, and how well you chase money. If turnover is modest or growing fast, and nobody in the business owns credit control, factoring buys back your evenings and that is worth paying for. If you already collect well and turnover sits comfortably above £500,000, discounting is cheaper and keeps the arrangement private. Priya chose factoring for a year, then moved to discounting once she hired someone to run the ledger. Whichever way you lean, do the sums against your own numbers first — a proper cash flow forecast often shows the gap is shorter than it feels, and steadily building your business credit profile opens cheaper doors later.

The real lesson from Priya’s biggest order

Priya’s firm survived, and it survived because she stopped treating a cash gap as a personal failure and started treating it as a plumbing problem with a price attached. That is the useful way to think about invoice finance vs factoring. Neither is a rescue and neither is a trap — they are simply expensive convenience, and the cost is worth it exactly when the alternative is turning down work. It is also worth weighing against a merchant cash advance, which suits a very different kind of business. Read the contract, ask the three awkward questions, and compare it honestly against the other funding routes open to you before you commit.

Frequently asked questions

What is the difference between invoice finance and factoring?

Invoice finance is the umbrella term for borrowing against unpaid invoices. Factoring is one type of it, where the provider collects from your customers. Invoice discounting is the other.

How much does invoice factoring cost in the UK?

Expect a service fee of 0.5% to 3% of invoice value, plus interest of about 1.5% to 3% over base rate. All in, that is usually 15% to 30% a year.

Is invoice finance regulated by the FCA?

No. Asset-based lending is exempt from FCA regulation. Protection comes from UK Finance’s Standards Framework and complaints process, but only if your provider is a member.

Will my customers know I am using invoice finance?

With factoring, yes, because the provider collects payment directly. With confidential invoice discounting, no — you keep chasing payment exactly as before.

How much of the invoice do I get up front?

Usually 70% to 90% of the invoice value, most often around 85%. The balance arrives once your customer pays, with the fees deducted.

What happens if my customer never pays?

On a recourse facility you repay the advance. On non-recourse the provider covers customer insolvency, subject to caps, but not disputes or ordinary late payment.

This article is general information, not financial advice. Rates, fees and market figures are drawn from UK Finance data and published provider guidance as at September 2026, and vary by business and provider. Check current terms and take professional advice before entering any finance agreement.