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Understanding invoice factoring and how the process works

Is invoice factoring the right solution for your business?

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What is invoice factoring?

Invoice factoring is a finance facility provided by an invoice finance broker to help business owners leverage their unpaid invoices enabling them to quickly improve their cash flow position.

Invoice factoring companies in the UK allow business owners to release up to 90% of the invoice value usually within 24-48 hours.

Invoice factoring companies in the UK offer an invoice funding solution, collecting payments on your behalf managed by a team of expert credit controllers.

How much does invoice factoring cost?

There is a service fee with any invoice factoring company in the UK but this is only deducted once the invoice factoring broker has collected the full payment from your customer.

Why not try our invoice factoring calculator below to find out what the costs will be based on your company's turnover, the amount you'd like to release from each invoice and the average time it takes for your customers to pay you.

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What are the main benefits of using invoice factoring companies?

    • You supply goods and services to your customers.
    • You send your customer the invoice made payable to Hitachi Capital Invoice Finance, and send a copy to us.
    • As your invoice factoring broker, we will give you up to 90% of the invoice amount. At this stage, a service fee is deducted from your account as a percentage of your turnover.
    • The customer settles the invoice in full by making their payment direct to us. When the remaining balance is paid, a small finance fee is deducted from your account, charged as a percentage of the amount lent
    • This invoice clears and we give you the remaining 10% balance minus the finance fee.

Invoice factoring fees calculator

Please note that costs are an estimate only and are based on the entered values. Your final quote may change once a Business Development Manager has assessed your business in more detail.

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What are the main different types of invoice factoring?

The needs of SMEs tend to vary according to growth stage and industry. To help you work out which type factoring financing will suit your business, here is a brief guide to the five main options:

What is confidential invoice factoring?

Confidential invoice factoring is a form of invoice factoring but with the extra benefits of invoice discounting. Your credit control is outsourced as with invoice factoring, but when the finance provider contacts your customers for payment of their invoice, they act as if they are part of your accounting department and not a separate company and will even have a dedicated phone line that appears to come from your business.

All communication with customers uses your company name, so as with invoice discounting, your customers are unaware of the outsourcing of this service and think they are dealing only with you - this is helpful to maintain customer relations.

What is recourse factoring?

Recourse factoring is a type of invoice factoring facility where you take responsibility for any unrecoverable funds. Imagine that you factor (or sell) an invoice worth £5,000 but your client defaults on the debt, and your factor cannot collect the money owed. Under a recourse factoring arrangement, you would then need to repay the £5,000 loan so that your factor wasn’t out of pocket.

Recourse factoring accounts for approximately 90% of all invoice factoring arrangements, because it allows factors to lend money without shouldering the risk of bad debt. Sole traders, contractors and start-ups tend to be offered recourse factoring arrangements too, but it’s worth remembering that recourse factoring facilities can still be immensely beneficial in the sense that they free up read cash for expansion, and allow you to take full advantage of your factor’s in-house credit control systems.

What is non-recourse factoring?

Under a non-recourse factoring arrangement, the factor assumes full responsibility for any bad debt, which means you won’t have to repay money leveraged against an unrecoverable invoice. These agreements tend to be rarer, and the risks associated with this kind of lending mean that factors normally charge more for non-recourse factoring.

Selective Invoice Factoring

Selective factoring, usually referred to as selective invoice discounting, allows you to choose which invoices you finance. This gives you greater control over the credit collection process, and allows you to avoid unnecessary fees if you have clients that can be trusted to make good on their invoices within the stated payment window. However, selective factoring does require some internal credit control, so this type of factoring tends to be less suitable for sole-traders and contractors.

Spot Factoring

Spot factoring facilities allow you to finance a single invoice. These facilities are normally used in emergency situations, and tend to be quite expensive.

Other types of factoring include; debt factoring, reverse factoring and accounts receivable factoring.


What are the advantages and disadvantages of invoice factoring companies in the UK?

What are the advantages of invoice factoring?

With invoice factoring, you will:

    • Benefit from improved cash flow
    • Enjoy better working capital, which means more money for growth projects, staff training or stock purchases
    • Be able to move away from more restrictive forms of finance, like small business loans or overdrafts
    • Benefit from your chosen finance provider’s in-house credit control processes
    • Be able to focus on running your business, instead of chasing clients for payment

 

What are the disadvantages of invoice factoring?

There are some disadvantages of invoice factoring too - your clients will be informed that you’re using an invoice factoring service, and your factor will contact them to collect on factored invoices which means that:

    • The image of your company may be affected, particularly if your clients assume that you are not established enough to oversee your own credit control
    • You won’t be able to maintain your standard approach to client communication
    • You may find that some of your clients prefer working with you directly, and dislike the fact that they have to interact with your finance provider.

It is also important to remember that most invoice factoring agreements are recourse arrangements, which means that you will be responsible for any unrecoverable invoices. 


Invoice factoring companies in the UK have been revolutionised with our digital onboarding process


Invoice factoring company awards

Best Invoice Finance Provider 2021

Highly Commended Factoring Provider 2021

Best Invoice Finance Service 2021

Best Invoice Factoring Provider 2020


  • What are the main different types of invoice factoring?

    The needs of SMEs tend to vary according to growth stage and industry. To help you work out which type factoring financing will suit your business, here is a brief guide to the five main options:

    What is confidential invoice factoring?

    Confidential invoice factoring is a form of invoice factoring but with the extra benefits of invoice discounting. Your credit control is outsourced as with invoice factoring, but when the finance provider contacts your customers for payment of their invoice, they act as if they are part of your accounting department and not a separate company and will even have a dedicated phone line that appears to come from your business.

    All communication with customers uses your company name, so as with invoice discounting, your customers are unaware of the outsourcing of this service and think they are dealing only with you - this is helpful to maintain customer relations.

    What is recourse factoring?

    Recourse factoring is a type of invoice factoring facility where you take responsibility for any unrecoverable funds. Imagine that you factor (or sell) an invoice worth £5,000 but your client defaults on the debt, and your factor cannot collect the money owed. Under a recourse factoring arrangement, you would then need to repay the £5,000 loan so that your factor wasn’t out of pocket.

    Recourse factoring accounts for approximately 90% of all invoice factoring arrangements, because it allows factors to lend money without shouldering the risk of bad debt. Sole traders, contractors and start-ups tend to be offered recourse factoring arrangements too, but it’s worth remembering that recourse factoring facilities can still be immensely beneficial in the sense that they free up read cash for expansion, and allow you to take full advantage of your factor’s in-house credit control systems.

    What is non-recourse factoring?

    Under a non-recourse factoring arrangement, the factor assumes full responsibility for any bad debt, which means you won’t have to repay money leveraged against an unrecoverable invoice. These agreements tend to be rarer, and the risks associated with this kind of lending mean that factors normally charge more for non-recourse factoring.

    Selective Invoice Factoring

    Selective factoring, usually referred to as selective invoice discounting, allows you to choose which invoices you finance. This gives you greater control over the credit collection process, and allows you to avoid unnecessary fees if you have clients that can be trusted to make good on their invoices within the stated payment window. However, selective factoring does require some internal credit control, so this type of factoring tends to be less suitable for sole-traders and contractors.

    Spot Factoring

    Spot factoring facilities allow you to finance a single invoice. These facilities are normally used in emergency situations, and tend to be quite expensive.

    Other types of factoring include; debt factoring, reverse factoring and accounts receivable factoring.

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Factoring financing fees explained

Factoring financing fees explained

What are the costs of invoice factoring?

If you have decided to choose an invoice factoring company, or you are simply in the research stage and looking at all of your options, one of the big questions you will probably have is around invoice factoring costs. We have created this quick video guide to explain some of these fees, the terminology and what you might be expected to pay.


Why choose us as your invoice factoring company?

      • A 6 month trial period so you can be sure the product is right for you
      • Followed by a 6 month rolling contract – we don’t tie our clients in for long periods
      • A one fee solution with no hidden fees
      • Award-winning client service by our team of expert Client Managers
      • Our Relationship Management team are in the field to visit you in person
      • We are part of Hitachi Capital (UK) PLC, a company that is going from strength to strength – we’re here for the long term.

How does a factoring company work?

How does a factoring company work?

How do factoring companies work?

Find out more about the factoring company process and how they help many small to medium sized businesses by releasing cash from unpaid invoices, whilst leaving the chasing of late payments to one of our in-house specialists.


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Contact our friendly UK advisors on freephone

0808 250 0859

8:45 - 17:15 - Monday to Thursday &
8:45 - 16:45 - Friday


Invoice Factoring FAQs

Why would a UK company use a factoring company?

There are a number of reasons companies in the UK may utilise invoice factoring services for their business; primarily, factoring helps companies ease their cash flow concerns by receiving payment of invoices immediately. Slow paying customers can put a strain on cash flow and factoring with Hitachi Capital Invoice Finance gives businesses an option to receive cash in 24 hours, as opposed to waiting 30, 90 or even 120 days to get paid by customers.

 

Is invoice factoring considered a loan?

Technically speaking factoring is not considered a loan as it is a purchase of accounts receivable. The factoring company purchases future receivables (invoices) and provides the business with a percentage value of the invoice upfront. The remaining balance minus a fee is then paid to the business once the invoices have been settled. Rather than a business waiting a significant length of time for an invoice to be paid, invoice factoring enables a business to access cash quickly and easily.

 

Is invoice factoring regulated in the UK?

Invoice factoring is not currently regulated by the Financial Conduct Authority (FCA). An industry-wide code of conduct is provided by the UK Finance to ensure a fair service and integrity is provided for invoice factoring services. It is widely accepted that the regulation of the invoice finance sector would contribute to the increasing costs of its services. Therefore, this enables invoice factoring providers to remain competitive and provide a low-cost solution for businesses seeking to utilise invoice factoring services.

 

Should I use a factoring company?

Invoice Factoring has become a popular method of business funding. For businesses who tend to experience longer payment terms with regards to their invoices, invoice factoring can be the solution as it is designed to provide working capital for businesses instantaneously. Moreover, it can be a beneficial service for all types of businesses seeking immediate access to cash without suffering cash flow issues from the 30 to 90 days it takes for the payment of their invoices.

 

How much does invoice factoring cost?

The cost for invoice factoring is split in to three key areas. A set up fee for the administration of establishing the facility. The service fee covers the management and admin costs related to your account and is charged as a percentage of your gross turnover.

Finally the finance fee is the cost of the money you draw down and is charged daily against your outstanding balance.

All reputable finance providers will be transparent about the fees and costs related to the facility prior to signing the agreement.


Smarter, Faster and Simpler Invoice Factoring solutions with Hitachi Capital

Smarter, Faster and Simpler Invoice Factoring solutions with Hitachi Capital

Smarter, Faster and Simpler Invoice Factoring with Hitachi Capital

Find out how we are revolutionising the way UK SME's access cashflow finance.


Alternative invoice factoring products from Hitachi Capital 


Get a quote

Contact our friendly UK advisors on freephone

0808 250 0859

8:45 - 17:15 - Monday to Thursday &
8:45 - 16:45 - Friday