What is invoice finance, and what does factoring actually cost?
Borrowing against money customers already owe you — releasing cash from unpaid invoices rather than waiting for payment terms to run. It solves a genuine problem for growing businesses and is considerably more expensive than the headline rate suggests.
The two main forms:
Invoice discounting. You borrow against the invoice ledger and continue collecting payment yourself. Customers need not know, which is why it is described as confidential. Suited to established businesses with good credit control.
Factoring. The provider takes over credit control and collection, chasing your customers directly. Cheaper for businesses without a collections function, and your customers know — which some businesses regard as a signal of financial weakness and others as simply outsourcing.
Selective or spot factoring, financing individual invoices rather than the whole ledger.
How it works. The provider advances a proportion of the invoice — commonly 70–90% — within a day or two. When the customer pays, you receive the balance minus charges.
Where the real cost sits, and this is what catches people:
The discount or service charge, quoted as a percentage — which looks small because it is stated per invoice, not per year. A charge that sounds modest against a 30-day invoice is a much larger annualised rate, and comparing it to a bank loan APR requires that conversion.
A separate service fee as a percentage of turnover.
Minimum fees, payable whether or not you use the facility.
Arrangement, audit, credit check and termination fees.
Long contract terms with notice periods, which are the most commonly regretted clause.
Recourse versus non-recourse, which is the important distinction: with recourse, if the customer does not pay, you repay the advance. Non-recourse transfers that risk at higher cost, and typically has conditions that limit when it actually applies.
When it makes sense: long payment terms with creditworthy customers, growth outpacing cash, and seasonal working capital gaps.
When it does not: as a fix for unprofitability, since it accelerates cash without creating any, and each month arrives already spent.
General information, not financial advice.