Is factoring a suitable lending option for your business?

How to check if your small business is eligible for factoring

Factoring is a form of business funding which makes use of unpaid invoices by advancing cash of anything up to 90% of the value of the invoice at any point from its creation. Due to the nature of this type of invoice finance, factoring requires a business to be:

  • Selling business-to-business;
  • Providing credit terms to customers (for example, 30 days to pay an invoice).

Factoring, along with other invoice finance products, is a flexible form of business finance. This means no matter what your business size, industry or situation, you are likely to be considered. Having said this, there are a few common factors which may influence the initial advance amount and service charge you receive. These factors can include:

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Although almost every industry is considered to be factorable to some degree, there are a few generalisations which you should be aware of. For instance, the construction and IT software industries are usually offered less of an advance amount than other popular factoring using industries such as recruitment, wholesale and distribution, manufacturing and business services which can be offered up to as high as a 95% advance rate. This is down to how ‘risky’ your industry is seen as by the lender and could mean you are not offered the full advance rate of 90%. This is when you need to assess how much of an advance you would require from your invoice in order to maintain a healthy cashflow to cover costs and allow room for growth.

Factoring is a full time facility

There is a monthly fee for a business taking out a factoring service. As a result, it makes sense that you use factoring to advance cash from the majority of your unpaid invoices on credit in order to benefit best from the factoring facility. If you feel you are going to require cash advanced through factoring for a third of the year or less (that means about 120 days of the year), you may be more interested in spot factoring which is the pay-as-you-go alternative to factoring without a service fee. Factoring can come with contract lengths of 30 days plus.


There are many businesses that will require a lending facility which is kept private (or confidential) from their customer. As a rule, factoring tends not to be confidential, so if this is a requirement for your business invoice discounting may be the better solution as it allows you to maintain control of the credit collection facility thus keeping the process confidential.

How can factoring help your business?

Factoring is used as a financial solution for many reasons. The most common reasons include:

  • Your business does not qualify for the bank loan or overdraft level you require.
  • The interest charged on the bank loan or overdraft is too high.
  • You do not want a bank loan or overdraft facility.
  • Your want to outsource your credit collection.
  • Your business often suffers from late payments from customers, impacting on your cashflow.
  • You require funding to support your businesses growth and expansion.

Whilst factoring is an extremely flexible finance product, your circumstances will likely decide how useful the facility could be for you. Depending on your industry and customers, your advance amount may differ to other businesses with a factoring facility. The best way to decide if factoring is the best solution for you is to approach a commercial finance broker. which will be able to further discuss your funding options and give free advice on what you can expect from a factoring facility.

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