What Is Debt Factoring In Business?

Debt factoring lets a business raise cash against invoices it has already issued but not yet been paid for. This page explains what it is, what the terms mean, who qualifies and what it costs.

Written by Marcus Wright, owner and founder of Bolton Business Finance Ltd, in financial services since 2008 and a commercial finance broker since 2019. Last reviewed September 2026.

What Is Debt Factoring In Business?

Debt Factoring or Debt Finance is a common type of finance that is used by UK businesses. When a company is owed money from other businesses (Debtors), this can be used as security to raise finance.

A bank or specialist factoring company will purchase the debt, making the money available as soon as the invoice is raised. Then when the invoice is paid by the customer, the balance is cleared with the factoring company.

This helps companies manage their cash flow and grow, without having to wait 30-60 days to get paid by their customers.

Debt And Debtor Factoring: The Definitions

Debtor Definition: In a business context a debtor is another person or business that owes that business money. It is common practice in the UK when trading with other businesses to grant them credit. For example you supply goods to another business and give them 30 days to pay the invoice.

Factoring Definition: Factoring is a type of business finance, it is also referred to as Invoice Finance. When Factoring, the debt owed to a business by its customers (Debtors) is used as security to lend money from a bank or other lender.

Debtor Factoring Definition: So putting the two definitions above together, debtor factoring is referring to finance secured against a business’s debtor book. Debt factoring is also referring to the same thing.

A Factoring facility usually entails every invoice going through the facility and the bank or lender providing credit control. However there are lots of different types of Factoring facilities to suit different businesses.

Basic Criteria For Debt Factoring

• The company must be providing goods or services to other businesses (B2B)
• The company must give credit terms (i.e 30 days to pay)
• The debt must be readily collectable upon due date

Beyond those three, the things a funder actually looks at are the quality of your customers rather than the quality of your own balance sheet. That is the point people most often miss. A young company with a small profit and one blue chip customer can be easier to fund than an older company with a long list of small, slow-paying accounts.

There is no minimum trading period with some funders, which is why factoring is one of the few facilities genuinely available to a start up. There is also no fixed minimum turnover with most factoring providers, unlike invoice discounting.

How Debt Factoring Works, Step By Step

1. You do the work and raise the invoiceNothing changes about how you trade. You invoice your customer as normal, on your usual terms.
2. The invoice is uploaded to the funderUsually through an online platform, either manually or by a direct link with your accounting software.
3. The funder advances a percentageTypically 85% to 90% of the invoice value, usually in your account within 24 hours.
4. The funder collects payment from your customerCredit control is part of the service. Your customer pays the funder directly, into a trust account in your business name.
5. The balance is releasedWhen the invoice is settled you receive the remaining percentage, less the fees.

The facility revolves. As old invoices are paid and new ones are raised, the funding available moves with the ledger. You are not drawing down a fixed loan and repaying it on a schedule.

A Worked Example

A business invoices £50,000 a month on 30 day terms, on a factoring facility with an 85% advance rate.

The discount fee is calculated on the Bank of England base rate, 3.75% as at September 2026, plus a margin. It only applies to money actually drawn and only for the days it is outstanding, so a customer who pays early costs you less.

Those figures are illustrative. Pricing moves with sector, turnover, customer spread and how clean the ledger is. Low risk sectors such as transport and haulage typically price below a general SME book. For the full picture on fees, including the ones that are easy to miss, see the costs of factoring.

How Can Factoring Help A Business?

Firstly lets talk about how factoring works and what it does. Factoring is a type of business finance that releases cash from unpaid customer invoices.

So if you trade B2B and give your customers credit (eg 30 days payment terms), then you will be owed money from your customers.

What factoring does is give you quick access to the money that is tied up in your trade debtors. Typically you could release up to 90% of your outstanding trade debtor balance, helping ease cash flow pressures.

What Are The Benefits Of Factoring For A Business?

There are a number of potential benefits of Factoring that could help a business. Factoring provides a long term solution for cash flow issues caused by fast growth and slow paying customers.

Here are just some of the possible benefits a business may get from using Factoring finance.

• Access 90% of Sales Ledger
• Outsourced Credit Control and Collections
• Ease cash flow pressure
• Long term finance solution for fast growing businesses
• Could offer better credit terms to win more business
• Revolving facility, only repay capital when customer pays

The outsourced credit control is worth more than it looks on that list. For a business without a dedicated finance person, the time spent chasing payment is a real cost, and a funder chasing on your behalf usually gets paid faster than you do.

What To Be Aware Of

Its worth noting that each lender will have its own terms and conditions that may vary. A Factoring facility will incur interest and/or fees.

As every business is different is worth speaking to a commercial finance broker about your options. Factoring may not be the only available finance solution for your business. Also some lenders only cover certain sectors.

• It is disclosed. Your customers will know, because they pay the funder. If that matters commercially, invoice discounting is the confidential alternative, though the entry criteria are tighter.
• Notice periods. Most facilities carry a notice period, commonly three months. Check it before signing, not when you want to leave.
• Concentration limits. Funders cap how much of your ledger one customer can represent, often around 25% to 40%. If one customer is most of your turnover, that limits what you can draw.
• Recourse. On a standard facility you carry the bad debt risk. If an invoice goes unpaid past the recourse period, the funder recovers the advance from you. Bad debt protection can be added at extra cost.
• Not every invoice qualifies. Work in progress, staged payments, retentions and anything invoiced before delivery may be excluded or funded at a lower rate.

Debt Factoring FAQ

Related Guides

• Invoice factoring explained
• Invoice discounting vs factoring
• What factoring costs
• Single invoice finance, if you only need one invoice funded
• Invoice finance, the full range

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