Accounts Receivable Factoring Best Practices

UK businesses granting 30-90 days credit terms often struggle with revenue locked up as unpaid invoices. As a CFO or finance team member, you’ve likely realised that revenue doesn’t always equal cash. Outstanding invoices could cost you time, money, relationships, opportunities and your business’ survival.

Also, recent research proves that late payments are increasing in the UK and hurting businesses. As of June 2024, consumers credit excluding student loans in the United Kingdom increased to £229.6 billion¹. A recent study by the Federation of Small Businesses revealed that about 440,000 businesses were at risk of shutting down due to late credit payments².

So how can your business avoid pausing operations or financial obligations till customers pay? Accounts Receivable (AR) factoring offers a way out.

We’ll show you how to quickly generate cash by factoring your business’s accounts receivable. Plus, if you’re looking for a way to receive international payments at mid-market exchange rates, you may find Wise Business helpful.

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What is accounts receivable factoring and how does it work?

Accounts receivable factoring is a financial transaction through which a third party (factor) buys a business’s unpaid invoices at a discount in exchange for upfront cash, thus quickly improving its liquidity. It often lets businesses receive cash within hours to weeks without waiting for customers to settle invoices.

So how does accounts receivable factoring work?

• A business sells a product or service and invoices the customer.
• The business sends the invoice or list of invoices it wants to sell to a financial institution (the factor).
• The factor verifies the customer’s creditworthiness and the invoice.
• If the factor is satisfied, it presents a proposal to the business that outlines terms like the advance rate, factoring rate and administrative fees.
• If they both agree, the factor signs an agreement with the business and provides 75% to 95% of the invoice amount (advance rate).
• Depending on the agreed payment terms, the business may notify the customer or keep it confidential.
• Customers pay to the business or directly to the factoring company.
• When customers pay, the factoring company remits the balance (25%) minus the factoring fee (1%-4% of the invoice per month).

Accounts receivable factoring differs from other business credit products in the following ways:

• Invoice ownership: Factoring of accounts receivable involves selling invoices to the factor and transferring risks and debt collection efforts to the factor (especially in non-recourse factoring). Contrarily, business credit products provide finance against the business’s assets without taking ownership of accounts receivable.
• Eligibility criteria: A business’s eligibility for AR factoring relies more on its customer’s creditworthiness, unlike traditional credit facilities which require thorough documentation and review of the business’s financial records and credit history.
• Speed and cashflow impact: AR factoring provides funds within hours to a few weeks without incurring debt. This is faster than other business credit products like bank loans, which typically take longer and require monthly repayments, negatively affecting cashflow.
• Costs: AR factoring costs include a percentage of the invoice value – typically 1.5%-5% per month and other fees depending on the customer’s creditworthiness. While the cost of other business credit products like bank loans is based on interest rates, which you pay on the balance you carry over from month to month.

Factoring accounts receivable example

Here's an accounts receivable factoring example:

HR Force UK, a temporary staffing brand in Glasgow, received an opportunity to provide staff to Gold Manufacturing LLC., a manufacturing brand. However, it struggled with the customer’s 90-day payment cycle as it needed to pay the staff about £120,000 within 30 days. They had maxed out their credit line and the bank couldn’t provide quick financing.

The management contacted B-Capital, a factoring company and factored the £240,000 invoice they’d sent to Gold Manufacturing LLC. In 48 hours, B-Capital provided £216,000 (90% of the invoice) at a 1.5% factoring rate, allowing HR Force to pay the staff promptly.

Types of accounts receivable factoring

We can generally group business accounts receivable factoring into three categories. These are:

• recourse vs non-recourse
• spot vs. regular
• notification vs non-notification

Recourse vs non-recourse

Recourse AR factoring requires the business to buy back unpaid invoices or replace them if customers default in payments. These generally cost less with higher advanced rates or upfront cash.

While non-recourse AR factoring transfers the risk to the factor and attracts higher costs.

Spot vs regular

Spot AR factoring covers a single unpaid invoice. Businesses generally opt for this when factoring large invoices. On the other hand, regular AR factoring is an ongoing agreement to sell unpaid invoices to a factoring firm.

Notification vs non-notification

In a notification AR factoring arrangement, the business informs its customers about the factoring agreement and lets them pay the factor directly.

Alternatively, non-notification AR factoring permits the business not to disclose AR factoring to their customers. The business receives the payments on behalf of the factor or through a bank account controlled by the factor but bearing the name of the business.

Best practices when factoring accounts receivable

Here are some best practices when factoring accounts receivable.

• Prepare your business beforehand: Position your business to be eligible for AR factoring before you need financing. Research factoring firms, learn about their terms and apply the requirements to your business. Some of the ways to prepare are to:

  • Ensure your financial records are accurate and up-to-date.
  • Avoid payment conditions that discourage factors. Some examples are:
    • Return policies: Lets customers demand reimbursement making invoices unreliable.
    • Self-billing: Allows customers to create and send invoices on behalf of your business.
    • Pay when paid conditions: Permits customers to pay when they have the funds.
  • Make sure invoices are lien-free and for business-to-business transactions.

• Follow due diligence before extending credit to customers: Higher quality credit increases your chances of accounts receivable factoring offers. Factors are particular about the kind of customer you’re transacting with. A factoring firm might be more comfortable with a government, a known company like Amazon, or any other creditworthy customer.

  For example, if you wish to factor a £5000 invoice, the factoring firm may check if the customer has promptly paid £5000 or higher before.

• Use factoring to boost profitability: Avoid factoring invoices to finance capital expenditure or service debt. Businesses with a decent profit margin benefit more from AR factoring as they still have profit after the factor collects factoring rates or invoice discounts and other fees.

  Before opting for AR factoring, create financial projections for the next three years. These should capture what your revenue will look like with and without factoring. Will your business be profitable after paying factoring costs?

• Compare various factoring companies: There are 100+ factoring companies in the UK ranging from small companies to banks³. Don’t get stuck with your bank’s factoring facility. Diligently compare the offers, fees and terms of three to five factoring firms to avoid handing over your company’s sales ledger to the wrong factor.

  For instance, some factoring companies require 12 months' notice to end factoring agreements. Within this time, they won’t finance your invoices, which could be detrimental to your business. Ask your lawyer or factoring broker to review the documents to spot risky clauses.

• Choose an accountable factor: Choose a factor that is a member of UK finance. Its members follow a code of conduct and are answerable to its Professional Standards Council when they default.

• Understand the legal context of factoring: Laws governing invoice financing and factoring vary across countries and parts of the UK. The UK’s law classifies invoice discounting as a type of invoice factoring⁴. This permits businesses to factor invoices without disclosing the arrangement to the debtor.

  Scottish law, on the other hand, requires your business to inform the customer about the sale of invoices⁵. This is based on the Publicity Principle.

  Also, protect your customers’ privacy and data in line with GDPR.

Accounts receivable factoring benefits

Here are some benefits accounts receivable factoring offers:

• Quick cashflow increase: AR factoring lets you secure cash immediately and meet other financial obligations without relying on customer payments.
• Flexibility: Many factoring firms let you factor as many or as few of your outstanding invoices.
• Time savings and outsourced debt collections: Businesses can focus on more strategic activities while the factor chases payments.
• Sells assets: AR factoring isn't recorded as debt on the balance sheet since the factor buys the outstanding invoices. It doesn't negatively affect the creditworthiness of your company.
• Eligibility depends on customers’ creditworthiness: Access finance is according to your turnover, not your credit rating.

Accounts receivable factoring providers in the UK

Some of the receivable factoring firms in the UK include:

• Royal Bank of Scotland
• HSBC
• Bibby Financial Services Ltd
• Close Brothers Invoice Finance
• eCapital
• Novuna

Accounts receivable factoring rates

Accounts receivable factoring rates are generally between 1%-5% of the invoice value but rates are only a fraction of the cost of AR factoring. Factoring costs also include fees that cover handling your business’ ledger, possible legal services and debt collection.

At times, rates are tiered and can be less in the first month but increase by a fraction intermittently. For example, AR factoring rates could be 1.5% for the first 45 days and afterwards, consistently increase by 0.5% every 10 days.

The risk of your business’s insolvency, possible debtor default and the type of factoring – recourse or non-recourse can determine what percentage of the unpaid invoice the factor offers you upfront.

Here are the average AR factoring rates and advanced rates across some industries in 2024 (UK inclusive)⁶.

S/N	Sector	Factoring Rate	Initial Prepayment Percentage (IPP)
1.	Construction	3.0% - 6%	70% - 80%
2.	Food and Beverage	2.5% - 5.5%	70% - 90%
3.	General Small Business	1.95% - 4.5%	85% - 95%
4.	Healthcare	2.5% - 4.5%	85% - 95%
5.	Retail and Wholesale	1.9% -4.5%	80% - 95%
6.	Staffing	1.9% -4.5%	85% - 97%
7.	Wellness	2.5% - 5.5%	70% - 90%

*Disclaimer: This is only an average calculated by eCapital and doesn’t replace the required due diligence in AR factoring. Kindly speak with your chosen factor to confirm rates before signing any documents.

Some other factors that can influence the cost of factoring are:

• Length of factoring period: If your customer isn’t reliable and delays payment, you may incur overdue fees, indirectly increasing your costs.
• The number of invoices you’ll be factoring: If possible, factor fewer invoices with larger amounts than many invoices with smaller amounts. More invoices mean higher debt collection efforts and costs. This may increase the service fees.
• Your business’s niche: Some industries, like staffing and services, e.g. IT services, are considered less risky compared to construction. Higher-risk sectors like construction may attract higher rates and fees.

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FAQs on accounts receivable factoring

Here are some of the most common questions answered:

How does account receivable factoring work?

A business sells invoices to a factoring firm at a fee, and the factor pays between 75% to 95% of the invoice within hours to a few weeks.

When the customer of the business pays the factor, it remits the balance less its factoring fee.

What are the advantages and disadvantages of AR factoring?

Some AR factoring advantages are:

• fast improvement in cashflow
• eligibility criteria is dependent on your customer’s creditworthiness
• outsourced debt collection and time-saving

Some AR factoring disadvantages are:

• high costs in cases of delayed customer payments
• risks of losing good relationships as some customers view the factoring company’s involvement negatively

How much does it cost to factor accounts receivable?

AR factoring costs between 1.5% to 5% of the invoice amount and some additional fees depending on the industry and creditworthiness of your business’ customer.

Is receivables factoring considered debt?

No. Receivables factoring involves selling assets, in this case, accounts receivable. It's not recorded as debt on the balance sheet.

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Sources used:

1. https://www.statista.com/statistics/311436/uk-lending-total-amounts-outstanding-from-consumer-credits-in-the-uk/
2. https://www.fsb.org.uk/resources-page/400-000-small-firms-threatened-by-late-payment-as-costs-surge-new-study-finds.html
3. https://www.ibisworld.com/united-kingdom/industry/factoring/3711/#:~:text=There%20are%20102%20businesses%20in,3.5%20%25%20between%202019%20and%202024
4. https://www.gov.uk/hmrc-internal-manuals/vat-finance-manual/vatfin3220#:~:text=Invoice%20discounting%20(also%20known%20as%20confidential%20factoring%20or%20undisclosed%20factoring)%3A%20as%20for%20agency%20factoring%20but%20the%20factoring%20arrangement%20is%20not%20disclosed%20to%20the%20debtor.%20Can%20be%20with%20or%20without%20recourse.
5. https://www.scotlawcom.gov.uk/files/6112/7892/7069/dp121_registration.pdf (Pg 1 Section 1.3 -1.5 )
6. https://ecapital.com/blog/2022-invoice-factoring-rates-and-costs/

Sources last checked on date: 30-Jun-2025