If you sell on 30–90 day terms, you already know the gap between doing the work and getting paid can feel huge. Factoring is one way to bridge that gap. In plain English: you sell your invoices to a finance provider (a “factor”) for immediate cash. They advance most of the invoice value now, then collect payment from your customer later and pass you the balance (minus fees). It’s common across B2B industries - from manufacturers and wholesalers to recruitment and logistics.
This guide explains what factoring is, how it works day-to-day, the different types of factoring (recourse, non-recourse, spot, whole-turnover, and freight factoring), and how it compares with other invoice finance options such as invoice discounting. We’ll finish with a quick checklist to help you decide if it fits your business - and mention an alternative if you’d rather offer flexible terms at checkout without selling invoices.
What is factoring and how does it work?
Picture this: you run a B2B business and you’ve just shipped a big order. You’ve raised the invoice on 30 - 60 day terms - but payroll and stock can’t wait. Factoring (also called invoice or debt factoring) lets you turn that unpaid invoice into working capital now. A finance provider (the factor) advances most of the invoice value upfront, then collects from your customer later. When they pay, the factor deducts its fees and sends you the remaining balance.
How it works, step by step
- You raise an invoice to your customer on normal credit terms.
- You enter a factoring agreement (one-off “spot” or an ongoing facility). The factor will usually run quick credit checks on your customers.
- The factor advances a large portion of the invoice value to you—cash lands in your account quickly (think “early access to cash”, not a loan).
- Your customer pays the factor on the due date.
- The factor takes the agreed fees and releases the remainder to you (often called the reserve).
Recourse vs non-recourse (the risk bit)
- Recourse: if your customer doesn’t pay, you’re ultimately responsible for the shortfall.
- Non-recourse (if eligible): the factor bears the approved bad-debt risk on that invoice.
Two related questions people ask
- What is reverse factoring? Also called supply-chain finance, it’s initiated by the buyer. Their finance partner pays approved suppliers early (for a small discount). The buyer then repays the partner later on extended terms—supporting the supply chain without suppliers arranging finance themselves.
- Is factoring the same as invoice finance? Factoring is one type of invoice finance. Another common product is invoice discounting (covered below), which usually leaves you in charge of credit control while still unlocking cash against your invoices.
Quick example: You issue a £50,000 invoice on 60-day terms. The factor advances, say, 80–90% now so you can cover wages and buy stock this week. When your customer pays on day 60, the factor deducts fees and releases the balance to you - smoothing cash flow without waiting two months.
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Key benefits of factoring for businesses
Smoother cash flow. You’re less exposed to long payment cycles and month-end crunches. That’s especially useful if you’re growing quickly, hiring, or buying materials in advance.
No new “term debt”. You’re selling an asset (the invoice) rather than taking on a traditional loan. For some SMEs, that’s more comfortable than adding another repayment schedule.
Collections support. In most factoring arrangements, the factor handles collections. That saves admin time and keeps your team focused on delivery and sales.
Flexible as you grow. The amount of funding available can scale with your sales. If you’re issuing bigger invoices to reliable customers, your accessible funding can rise to match.
None of this is magic. You’ll still weigh fees, customer experience, and operational fit. But for many businesses, access to cash now beats waiting 60–90 days, especially in busy seasons. For many businesses, the trade-off is simple: predictable cash flow now vs waiting for customers to settle later.
Different types of factoring explained
There are three useful ways to think about factoring: by risk model (who carries bad-debt risk), by scope (one-off vs ongoing), and by sector (industry-specific workflows). Here we will look at each one:
By risk model
Recourse factoring. Lower fees and broad eligibility, but you’re responsible if a customer doesn’t pay. Many suppliers choose recourse when their debtor book is reliable and they want to keep costs down.
Non-recourse factoring. Higher cost because the factor assumes approved credit risk (e.g., insolvency) on eligible invoices. This can suit suppliers with a handful of large accounts where a default would really hurt.
By scope
Spot factoring. Fund a single invoice (or a small batch) when needed—useful for seasonal spikes or big one-offs—without committing your whole ledger.
Whole-turnover (disclosed) factoring. You factor most or all eligible invoices on an ongoing basis. This tends to unlock sharper pricing, steadier cash flow and simpler operations.
Sector-specific
Freight / truck factoring. Built for logistics: faster cycles, proof-of-delivery (POD) handling, quick approvals and sometimes extras like fuel advances or back-office support. It’s still factoring - you sell the invoice for upfront cash - but the process is tuned to transport realities.
Factoring vs other invoice finance options
There isn’t a single “best” choice here - it’s a trade-off between control of collections, customer visibility, and how funding scales. Use this quick comparison to decide what fits your setup.
Factoring vs invoice discounting
- With factoring, the finance provider usually manages collections and your customer is typically aware (it’s “disclosed”).
- With invoice discounting, you keep control of collections and, in some cases, the arrangement is not visible to customers (often called “confidential”). Discounting can suit firms with strong credit control processes that want to keep everything in-house.
Factoring vs a traditional business loan or overdraft
- Factoring is linked to your sales ledger - it can scale up as you grow.
- Loans/overdrafts are fixed or capped. They’re useful, but they don’t expand automatically when you win bigger contracts.
Factoring vs “offer better terms” to win orders
If your goal is to close more B2B orders by giving customers longer to pay, factoring is one route - you get cash now while the factor waits for payment. Another route is to add a B2B Pay Later option at checkout, so you get paid upfront and customers spread their payments - without you selling the invoice at all (see “Alternatives” below).
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Is factoring right for your business?
A few quick filters before you spend time on paperwork:
- Your customers are other businesses (B2B) on credit terms, and they have solid payment histories.
- Invoices are clear and undisputed. Delivery accepted, goods/services verifiable.
- You value faster cash and are comfortable with the factor being involved in collections (or you choose discounting instead).
- The fees make sense given your margins and the speed/scale of funding you need.
Costs and fees. Pricing varies by provider, volume and debtor quality. Expect a service fee plus a time-based charge on outstanding invoices/unpaid invoice risk. Most factoring companies publish bands, and many factoring companies tailor rates for successful businesses with strong customer quality. In the UK finance market, it’s normal to see factoring fees drop as your business grows.
Use cases that commonly fit:
- Seasonal cash flow (busy periods where outgoings spike before income arrives).
- High growth (new contracts strain cash before receipts catch up).
- Longer terms (entering enterprise supply chains where 60–90 days is standard).
Alternatives to consider:
If your aim is to offer customers more time to pay while you still get paid upfront, a B2B Pay Later solution (like iwocaPay) can be a cleaner fit. It lets buyers spread payments on eligible orders, suppliers receive funds quickly, and there’s no need to sell the invoice. It’s not a replacement for factoring in every case - but it’s worth comparing if your main goal is smoother checkout and fewer abandoned orders.
Final word
Factoring is simply a way to turn sales you’ve already made into cash you can use now. If your margins, customer quality and admin flow line up, it can remove a lot of waiting without adding another loan to your balance sheet. If your bigger aim is to offer terms and reduce checkout friction, compare factoring with a B2B Pay Later option - both can help, but they solve slightly different problems.
