- Invoice factoring allows businesses to sell unpaid invoices to a factoring provider for quicker access to cash.
- The provider gives the business an upfront cash advance based on the value of the invoices.
- The invoice factoring company then takes over collecting payment from the customer.
- Once the customer pays, the remaining balance is transferred to the business, minus the provider’s fees and the original advance.
What is invoice factoring and how does it work? A comprehensive guide for 2026
11 June 2026
By Allianz Trade editorial team
Invoice factoring helps your business access money tied up in unpaid invoices by selling them to a third-party provider in exchange for a cash advance.
If your business is dealing with temporary cash flow gaps, unexpected expenses, or new growth opportunities, invoice factoring can be a quick and flexible way to access working capital without having to wait for customers to pay their invoices.
If you’re unsure how it works or whether it’s the right fit for your business, this comprehensive guide helps to explain everything clearly.
Summary
Key Takeaways
Definition of invoice factoring
Invoice factoring is when a company sells some or all of its unpaid invoices to a third party, known as a “factor”, in exchange for a cash advance. This cash advance is usually 80% to 90% of the value of the money owed on the invoices.
That cash advance can then be used by the original company as it sees fit, for example to cover debts, buy materials or equipment, make new investments, or pay salaries.
The invoice factoring company takes over responsibility for collecting the unpaid invoices. When the factor collects the money, the remainder is paid back to the original company, minus the agreed fees.
To see how invoice factoring compares to invoice discounting and financing, see our helpful article on invoice factoring finance.
How does invoice factoring work
Invoice factoring is a step-by-step process, beginning when an invoice is issued and ending when the issuer receives payment.
Step 1: Generating an invoice
In exchange for the unpaid invoice(s), the factor makes a cash advance against the value of the invoices. Typically, this is 80% to 90% of the value of the invoice.
Step 2: Invoice selling
If a company wishes to unlock funds represented by an invoice before the due date, it can sell the invoice to a factor, releasing a proportion of the funds before the invoice is paid.
Step 3: Advance payment
In exchange for the unpaid invoice(s), the factor makes a cash advance against the value of the invoices. Typically, this is 80% to 90% of the value of the invoice.
Step 4: Collection by the factor
When the factor buys the invoices, they take over responsibility for collecting the payment. A factor differs from a debt collection agency in that a factor takes over responsibility for collecting payment for debts that are not yet overdue, while a debt collection agency chases overdue invoices in exchange for a fee.
Step 5: Remaining payment
When the factor receives payment, it then forwards the outstanding balance to the original company, along with any interest or late-payment fees that have been collected, but minus their own fees.
Invoice factoring example
- A company sells an invoice worth £5,000 to a factoring company, in exchange for an 80% cash advance (£4,000).
- The factoring company then receives full payment from the customer.
- The factor then pays the original company the remaining 20%, minus a £500 factoring fee.
- In this case, the original company ends up with £4,500 of the initial £5,000 invoice.
Types of invoice factoring
Different types of invoice factoring can be used depending on the specific circumstances.
Recourse factoring
The most common type of invoice factoring is known as “recourse” factoring. Under recourse factoring, if the factor is unsuccessful in collecting an invoice, the original company is obliged to buy it back after a given period of time and remains ultimately responsible for any non-payment.
Non-recourse factoring
The alternative to recourse factoring is “non-recourse” factoring, where the factor assumes most, although not all, of the risk of non-payment. In non-recourse factoring, situations such as customer bankruptcy are usually specified and the company issuing the invoice remains responsible for non-payment. In most circumstances, factoring companies also restrict non-recourse factoring to invoices issued to customers with a good credit score.
Spot factoring
A small business may be quite comfortable managing invoices with regular clients for relatively small amounts but may be keen for a factoring company to take over responsibility for an unusually large invoice or invoices which represent a large proportion of the company’s annual turnover.
Spot factoring allows companies to decide which invoices to factor and which to continue to manage in-house.
Whole ledger factoring
In contrast to spot factoring, whole ledger factoring, also referred to as whole turnover factoring, involves selling all outstanding invoices rather than just a selection. It can be carried out on a regular basis.
Whole ledger factoring is an attractive solution for companies wanting to make the most out of an immediate cash advance, while other companies may enjoy the flexibility of picking and choosing which invoices to factor out and which to retain in-house.
Choosing the right type depends on your business size and cash flow needs. See our full piece on invoice factoring finance for a clear breakdown.
Benefits of invoice factoring
Although invoice factoring is not suitable for all companies, there are certain recognised benefits which make it an attractive option for many.
- Invoice factoring improves cash flow by unlocking funds tied up in unpaid invoices
- It can help cover short-term expenses or support growth opportunities
- Non-recourse factoring can reduce the risk of non-payment
- Invoice factoring companies often carry out customer credit checks
- Outsources collections and credit control can save internal resources
- Invoice factoring offers flexible funding options, including spot and whole ledger factoring
- It can be quicker and more accessible than traditional business loans
For a full overview of the pros and cons of invoice factoring finance, see our complete guide.
Disadvantages of invoice factoring
Despite its recognised benefits, invoice factoring has its disadvantages. Here’s a look of some of the downsides:
- Invoice factoring can be more expensive than traditional financing options
- Fees and interest charges can reduce overall profit margins
- Customers may be aware of the factoring arrangement
- Invoice factoring companies may take control of credit control and collections
- Some agreements require you to factor all invoices, not selected ones
- Businesses may still carry risk under recourse factoring agreements
- Long-term contracts and termination fees may apply
- Not all invoices or customers may qualify for funding
Our guide to invoice factoring finance dives into the full pros and cons of invoice factoring.
Invoice factoring costs and fees
Although tracking payment becomes the responsibility of the factor, the factoring process itself involves certain administrative tasks. These will represent in-house costs which may vary depending on the complexity and scale of the factoring scheme. In addition, there are other costs associated with factoring.
Discount or factoring fee
The services of an invoice factoring company come at a cost. A factoring fee or discount is a negotiable fee which the factoring company withholds from the value of the invoice when the invoices are sold. The value of the discount depends on factors including how long the factor anticipates it will take to recover the payment.
In most cases, the factoring discount will be up to 10% of the value of the invoice.
Service charges
As well as the discount, additional service charges may also apply. These additional service charges may include application fees, invoice processing fees, monthly fees, and termination fees, all of which can add up.
Interest charges
Along with service charges and discount fees, interest may also be applied to the value of the invoice. This will depend on how long the invoice remains unpaid.
Is invoice factoring the right solution for your business?
Invoice factoring can be a useful short-term solution for improving cash flow, but it’s always important to make sure your wider financial risk strategy is protecting your business in the long run too.
Every business faces financial risk, from late payments to customer insolvency, and without the right protection in place, these challenges can quickly impact cash flow, growth, and day-to-day operations. That’s why having a strong risk management strategy is essential.
If you’re exploring invoice factoring, trade credit insurance, or other cash flow solutions, it's best to seek expert guidance to help you make better decisions and choose the right approach for your business. Find out how our team at Allianz Trade can help protect your cash flow and support safer business growth. Contact us today.
Most invoice factoring providers can advance funds within 24–48 hours of an invoice being verified. Some specialist providers can process same-day payments. The speed of the initial setup, which involves credit checks on your customers, normally takes a few days to a couple of weeks depending on the provider.
Yes. Invoice factoring is generally more accessible to newer businesses than traditional bank lending because eligibility is based largely on the creditworthiness of your customers rather than your own trading history. Some providers do require a minimum trading period, so it is worth checking individual criteria before applying.
It can. With standard invoice factoring, your customers are made aware that a third party is managing your sales ledger and collecting payments on your behalf. The factor's communication style may differ from your own. If maintaining direct customer relationships is a priority, invoice discounting (where collections remain in-house) may be a better fit.
Potentially, yes. Because invoice factoring is secured against your customers' invoices rather than your own assets or credit score, some providers will consider applications from businesses with a poor or limited credit history. The key factor is the creditworthiness of the customers you invoice, not your own financial track record.
With recourse factoring, your business remains liable if a customer fails to pay. The factor will recover the advanced funds from you. With non-recourse factoring, the factor absorbs the risk of non-payment if a customer becomes insolvent. Non-recourse arrangements offer greater protection but usually come with higher fees.
This depends on whether your arrangement is recourse or non-recourse. Under a recourse agreement, the factor will reclaim the advance from your business if your customer defaults. Under non-recourse factoring, the factor absorbs the loss in most cases, though exclusions apply.
Spot factoring allows you to sell your invoices to a factor on a selective basis, giving you flexibility over when and how you use the facility. Whole ledger factoring requires you to factor all eligible invoices, providing a complete cash flow solution with ongoing credit control. Spot factoring suits businesses with occasional needs; whole ledger suits those wanting consistent support.
Factoring and invoice finance are ways for businesses to release cash tied up in unpaid invoices. With factoring, a provider advances funds and manages customer collections, while invoice finance usually allows the business to retain control of its sales ledger and collect payments directly.
An invoice factoring company is a finance provider that buys unpaid business invoices in exchange for an upfront cash advance. The company then takes responsibility for collecting payment from the customer, helping businesses improve cash flow without waiting for invoices to be paid.
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