What Is Invoice Factoring?

How invoice factoring works
In the UK: how the British Business Bank describes factoring

Invoice factoring is selling your unpaid invoices to a third party, called a factor. The factor pays you part of the invoices' value before your customers pay, collects the money from your customers when it's due, and keeps a fee for doing so. You get cash sooner, and you pay for it. The open textbook Introduction to Business 2e from OpenStax defines factoring as "A form of short-term financing in which a firm sells its accounts receivable outright at a discount to a factor."

Billed publishes this page. The definitions below are quoted from OpenStax Introduction to Business 2e (section 16.3) and the UK descriptions from the British Business Bank, a development bank owned by the UK government, both opened on October 29, 2026. This page doesn't give rates or say whether factoring suits your business. That's a decision for you, your accountant and the provider.

How invoice factoring works

OpenStax describes the sale this way: "A firm sells its accounts receivable outright to a factor, a financial institution (often a commercial bank or commercial finance company) that buys accounts receivable at a discount." It adds: "In factoring, a company sells its invoices to a third-party funding source for cash. The factor purchasing the invoices then collects on the due payments over time."

In practice, the steps are:

You deliver the work and send your customer an invoice.
You sell the invoice to the factor under your agreement with it.
The factor pays you part of the invoice's value, as set in the agreement.
Your customer pays the factor when the invoice is due.
The factor pays you the rest of the invoice's value, less its fees.

Your unpaid invoices are your accounts receivable, so factoring turns part of them into cash before your customers pay.

In the UK: how the British Business Bank describes factoring

The British Business Bank describes factoring as one of "two main types of invoice finance". It says a factoring provider "will also manage your sales ledger and be involved in collecting payment for your invoices direct from your customers." It also says: "Your customers are likely to know that your business is using a factoring provider."

The other type it describes is invoice discounting: "invoice discounting is a finance-only product, without the additional day-to-day sales ledger management and collection activity that is provided through factoring." See what is invoice financing for financing that uses invoices as security.

The fees involved

What you pay for: in the UK, the British Business Bank says: "A business will usually pay a service fee (a percentage of the value of each invoice), and a discount charge (like interest)". The discount charge depends on the amount of funding used.
Compared with a loan: OpenStax says: "Factoring is more expensive than a bank loan, however, because the factor buys the receivables at a discount from their actual value."
The amounts: each provider sets its own in the agreement. This page doesn't quote rates. Ask each provider for every fee in writing and compare the total cost with your other options.

Trade-offs to weigh

From the British Business Bank's description of invoice finance in the UK:

Your customers are likely to know. With factoring, "the credit control process is handled externally", which it says "could potentially influence how your clients view your business."
A minimum term. Providers "will require you to enter into an agreement for a minimum period of time."
Unpaid invoices. "Depending on the terms set by your lender, you may be held responsible if your customer fails to settle their invoice."
Credit checks. Providers run credit checks when you apply, and the bank says "These checks could have an impact on your credit report."
What you get beyond cash. With factoring, it says to "weigh up any cost savings that can be made from outsourcing some of your processes before making a decision, as it is not just finance that you will be receiving."

Factoring changes when cash arrives; it doesn't change how much your work earns. Read it alongside your cash flow statement.

Worked example: factoring two invoices

The business, invoices, advance and fees here are a sample, invented for this example. They aren't quoted rates or market terms; real terms come from each provider's agreement.

A design studio has two unpaid invoices, $6,000 and $4,000, both due in 45 days. Under its sample agreement, the factor pays 75% of the invoices' value up front, charges a service fee of 2% of the invoices' value, and charges a $100 discount charge.

Invoices sold: $6,000 + $4,000 = $10,000.
Paid up front: $10,000 × 75% = $7,500.
Held back until the customers pay: $10,000 − $7,500 = $2,500.
Fees: service fee $10,000 × 2% = $200, plus the $100 discount charge = $300.
Paid after the customers pay the factor: $2,500 − $300 = $2,200.
Total the studio receives: $7,500 + $2,200 = $9,700, which is $300, or 3% of the $10,000, less than the invoices' value.

In exchange for the $300, the studio has $7,500 about 45 days earlier than it would otherwise.

Where Billed fits

A factor will likely want to see the invoices you're selling and which ones are still unpaid. Billed's invoice software page says: "Invoice reports show which invoices are paid, partially paid or past due, and you can see who owes you money and send them a payment reminder." Its financial reporting page says: "All reports in Billed can be exported for use with your accountant, bookkeeper, or tax software." For consistent invoices, there are invoice templates and an invoice generator, and for repeat work, recurring invoices. If customers pay online, check where your factoring agreement says customers must pay before you send the invoice.

When this guide isn't for you

This guide is for small businesses that invoice other businesses. If you sell to consumers, invoice in more than one country, or are comparing factoring with other funding for a larger company, the terms and rules differ. Ask your accountant or lender before you sign anything.

Frequently Asked Questions

What is invoice factoring?

Selling your unpaid invoices to a factor, which pays you part of their value before your customers pay and collects from your customers when the invoices are due. OpenStax defines it as "A form of short-term financing in which a firm sells its accounts receivable outright at a discount to a factor."

Will my customers know I'm using factoring?

In the UK, the British Business Bank says that with factoring, "Your customers are likely to know that your business is using a factoring provider," because the provider is involved in collecting payment from them. It says "many invoice discounting facilities are undisclosed" and that invoice discounting is "generally provided on an undisclosed basis".

How much does invoice factoring cost?

Each provider sets its own fees in its agreement, so this page doesn't quote rates. In the UK, the British Business Bank says a business "will usually pay a service fee (a percentage of the value of each invoice), and a discount charge (like interest)". OpenStax says: "Factoring is more expensive than a bank loan, however, because the factor buys the receivables at a discount from their actual value." Ask your accountant or lender to compare the total cost with your other options.

What is the difference between factoring and invoice discounting?

With factoring, the provider buys the invoices and collects payment from your customers. In the UK, the British Business Bank describes invoice discounting as a finance-only product without that day-to-day collection activity.

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What Is Invoice Factoring? Cash Flow, Fees, and Trade-Offs