How much does invoice factoring cost in the UK? A guide for SMEs

Long payment terms and late-paying customers can leave you struggling to cover expenses or take on new work. Invoice factoring – a form of invoice finance – lets you access up to 90% (or more) of your unpaid invoices’ value within 24-48 hours. But the fees aren’t always straightforward, and some businesses end up paying more than they expected.

In this article, we’ll explain why an SME might use invoice factoring, the types of fees can be included, how much those fees can cost, the pros and cons, and tips to help you reduce invoice factoring costs.

Key points:

• Invoice factoring typically costs 1-5% of your invoice value, but fees vary widely by sector and turnover

• A £10,000 invoice could cost you £100-£500 in fees, depending on your industry and the finance provider you choose

• Funding Options by Tide can help when optimisation of working capital isn’t enough, offering access to business finance up to £20 million

Why might an SME use invoice factoring?

Waiting for customers to pay can be frustrating and stressful as it can put real pressure on your business. If you’ve ever struggled to cover payroll, buy stock or take on new work because of slow-paying clients, you’re not alone. Many SMEs face the same cash flow headaches, especially when payment terms stretch to 30, 60, or even 90 days.

Invoice factoring helps bridge that gap by giving you immediate access to the cash tied up in your unpaid invoices. Instead of waiting weeks or months for payment, you could get up to 90% (or more) of the invoice value within 24-48 hours.

It’s particularly useful if your business fits one of these scenarios:

• Your customers pay slowly, but you need cash now to keep things running smoothly

• You’re growing fast and need working capital to take on bigger orders or hire new staff

• You don’t qualify for a traditional loan, maybe because your business is new, your credit score isn’t perfect, or you don’t have assets to use as collateral

• You’re tired of chasing late payments and want to outsource the hassle to someone else

Invoice factoring isn’t a loan, so you won’t take on debt. Instead, you’re simply speeding up the payment process for work you’ve already completed. And because the factor focuses on your customers’ creditworthiness rather than yours, it can be easier to qualify for than other types of financing.

For many SMEs, invoice factoring is a flexible way to smooth out cash flow, cover unexpected costs, or fund growth without the stress of waiting for payments.

What types of fees can invoice factoring include?

While invoice factoring can help bring in money to your business more quickly than waiting for customers to pay, it doesn’t come free. Providers charge a range of fees, so it’s important to understand your obligations before you commit.

The two main costs of invoice factoring are:

• Service fee: This covers the admin and credit control work your provider will do. This may involve chasing payments, managing your sales ledger, and handling customer queries. It’s usually calculated as a percentage of your total turnover or invoice value, ranging from 0.75% to 4.5%

• Discount rate: This works like interest that’s charged on the cash advance. It’s an annualised percentage of around 1.5-5% that’s applied to the money you borrow. The longer your customer takes to pay, the more this adds up

But there are other charges to consider too:

• Setup fees: Some providers charge £100-£500 to get you started

• Minimum volume fees: You might have to pay a penalty if you don’t factor enough invoices each month

• Early termination fees: Some providers will charge 1-3% of your expected invoice volume for the remaining term if you want to end your contract early

• Late payment penalties: You could face additional charges if your customer pays late

The invoice factoring provider will also take a small cut of the invoice value as their profit. You’ll usually get 80-90% upfront, with the rest (minus fees) paid when your customer settles the bill.

How much do UK SMEs pay for invoice factoring?

The cost of invoice factoring can vary a lot depending on your industry, turnover and customers’ creditworthiness.

Why is there a difference? Invoice factoring providers see some industries as riskier than others. Construction businesses, for example, often face slower payments and more disputes, so they pay higher fees. Recruitment agencies, on the other hand, usually have more predictable, creditworthy clients, so they get better rates.

Your turnover also plays a big role. Businesses with over £500k annual revenue can often negotiate rates below 1.5% service fee and 2.5% discount rate, especially if they factor most of their invoices. Smaller businesses or those in riskier sectors will usually pay more.

Examples of invoice factoring costs for UK businesses

Let’s look at how much factoring could cost three different types of businesses.

Example 1: Small construction firm (£50k turnover)

• Invoice value: £10,000

• Advance rate: 80% (£8,000 upfront)

• Service fee: 3% (£300)

• Discount rate: 4% per annum (£26 for 30 days)

• Total cost: £326 (3.26% of the invoice)

• You receive: £9,674 when the customer pays

For a small builder, that’s a steep cost – but it might be worth it if the alternative is waiting 60 days for payment or turning down new work.

Example 2: Recruitment agency (£500k turnover)

• Invoice value: £50,000

• Advance rate: 90% (£45,000 upfront)

• Service fee: 1.5% (£750)

• Discount rate: 2% per annum (£123 for 30 days)

• Total cost: £873 (1.75% of the invoice)

• You receive: £49,127 when the customer pays

Here, the agency’s larger turnover and lower-risk clients result in being offered better rates. The cost is still significant, but it’s a fraction of what a business loan or overdraft might charge for the same speed.

Example 3: Healthcare supplier (£1m turnover, NHS clients)

• Invoice value: £100,000

• Advance rate: 90% (£90,000 upfront)

• Service fee: 1.2% (£1,200)

• Discount rate: 2% per annum (£493 for 30 days)

• Total cost: £1,693 (1.69% of the invoice)

• You receive: £98,307 when the customer pays

With strong clients and high volume, this business secures some of the best rates available.

Pros and cons of invoice factoring for SMEs

Invoice factoring can be a great way of boosting your cash flow, but it isn’t right for every business. 

Pros of invoice factoring:

• Fast access to cash: Get paid in 24-48 hours instead of waiting 30-90 days

• No debt: You’re selling an asset (your invoices), not borrowing money

• Outsourced credit control: The invoice factoring provider chases late payments, saving you time and hassle

• Easier to qualify: Providers care more about your customers’ creditworthiness than your business’s credit score

Cons of invoice factoring:

• Costs add up: Fees can be higher than a traditional loan if you qualify for one

• Customers know: Some may see it as a sign of financial stress (although it’s becoming more common)

• Contracts can be inflexible: Beware of long lock-ins or minimum volume requirements

How to reduce invoice factoring costs

You don’t have to accept the first quote you get. Here’s how to keep your costs down:

• Shop around: Fees vary widely between providers, so get at least three quotes and use them to negotiate

• Factor selectively: If you only need cash for certain invoices, look for selective invoice finance (spot factoring) which doesn’t involve a long-term contract

• Improve your customers’ credit: Providers charge less if your clients are low-risk (e.g. large corporations or regulated bodies like the NHS)

• Increase your volume: The more you factor, the better rates you’ll get. If you’re close to a turnover threshold (e.g. £500k), ask for a discount

• Negotiate the discount rate: This is often the most flexible part of the fee. Push for a cap (e.g. limiting the discount rate to 3%)

Find business finance with Funding Options by Tide

Whether you’re looking for a standard business loan, a short-term business loan, or something a little more specialist, like auction finance for property developers, we’re one of the leading names in business finance in the UK, having helped facilitate over £1 billion in finance to more than 20,000 customers.

Checking if you’re eligible is free, only takes a few minutes, and while a full application would impact your personal or business credit score, checking eligibility won’t. Just submit your details via the link below to find out if you could be eligible to borrow up to £20 million.

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FAQs

Will my customers know I’m using factoring?

Yes, as your customers will pay the invoice factoring provider directly. But it’s becoming more common, particularly in industries like construction and recruitment. Frame it as a way to streamline payments – many large firms use it too.

Can I factor just one invoice?

Yes, using selective invoice finance (also known as spot factoring). You pick which invoices to factor and only pay fees on those. It’s more expensive per invoice but gives you full control.

What happens if my customer doesn’t pay?

With recourse factoring, you’re liable for the invoice. With non-recourse, the factor takes the hit but you’ll pay higher fees. Always check the terms.

Is factoring tax-deductible?

Yes, invoice factoring fees count as a business expense, so they’re VAT-eligible and deductible for corporation tax.

How quickly can I get set up?

Most providers take 1-3 days to approve your application and start advancing cash. Once set up, funds for new invoices typically arrive within 24-48 hours.

Can I use factoring if my business is a startup?

You should be able to, but you’ll need to be a limited company and have B2B invoices. Some providers specialise in startups, so shop around.

What’s the difference between factoring and invoice discounting?

Factoring includes credit control (your customers know), while invoice discounting is confidential (you chase payments). Discounting is usually cheaper but harder to qualify for.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.