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Accounts receivable factoring

Understanding accounts receivable factoring, how it works and whether it's the right finance solution for your business

Where SMEs sell their outstanding invoices to a third party at a reduced rate, securing an immediate boost in cash flow.

Do you need accounts receivable factoring to help improve your cash flow?

We'll compare factoring products to get you the best deal, or you can call us on the number below to have a chat with one of our factoring experts.

Get accounts receivable factoring 0808 250 0859

What is accounts receivable factoring?

Accounts receivable factoring is a financial transaction where a company sells it receivables (invoices) to a factor, who collects the payments directly from the business’ customers. Most businesses choose this option if they want to receive their cash up front instead of waiting the duration of the agreed invoice payment terms.

How does accounts receivable factoring work?

Once a business has sold its invoices to a factoring company, they will be charged a factoring fee, which is commonly a percentage of the amount of receivables being factored. This amount can depend on a number of things, including the industry your business operates in, amount of receivables being factored, quality of your customers and the average number of days outstanding in receivables.

Accounts receivable factoring provides businesses with an option to finance their venture without taking out a loan.

Other types of factoring

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Spot Factoring

Spot factoring is a way for a business to access funds by selling unpaid invoices to a 3rd party, a spot factoring company, on a one off basis in order to receive payment quicker.

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Reverse Factoring

Reverse-factoring is a financing option where a 3rd party financial provider finances the supplier on behalf of the buyer. The process involves the supplier, the buyer and the finance provider .The supplier sells the buyer’s unpaid invoice to the finance provider and receives the cash quickly, the buyer also gets longer to pay for its goods.

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Recourse and Non-Recourse Factoring

Resource factoring is a form of finance where a company sells its invoices to a factoring company. The factor pays the company a percentage of their cash value and then chases up payment of the invoices on behalf of the company. Non-Recourse factoring is a form of finance where a company sells its invoices to a factor and receives a percentage of the cash value from them.

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Debt Factoring

Debt factoring is a finance facility provided by a debt factoring lender to help businesses leverage their acccounts receivable enabling them to instantly inject cash into the business. The debt factoring company pays the business a percentage of the total amount charged to the client and usually takes full responsibility for collecting the payment from the buyer.

What are the advantages and disadvantages of accounts receivable factoring?

Advantages of accounts receivable factoring:

  • This is a very simple form of commercial finance, and the main requirement is usually a client base with good credit.
  • Your own credit history is not usually considered, so if you have adverse history or have not been operating for a large period of time, you can piggyback on the good credit history of your clients.
  • Once your invoice has been sold, the factor will be the ones that chase the payment, meaning you no longer have to worry about playing the role of collector, and once the invoice has been paid, the money will be returned to the company they bought the invoice from, minus their fee.

Disadvantages of accounts receivable factoring:

  • You have to pay a fee to use this service, factors often buy invoices at discounted prices, meaning you’ll receive less money than if you processed your own invoices.

Why consider accounts receivable factoring?

There are many reasons why a business may factor an invoice, including increasing cash flow and mitigating credit risk.

Factoring is a financial transaction where a company sells it receivables (invoices) to a factor, who collects the payments directly from the business’ customers. Most businesses choose this option if they want to receive their cash up front instead of waiting the duration of the agreed invoice payment terms.

Once a business has sold its invoices to a factoring company, they will be charged a factoring fee, which is commonly a percentage of the amount of receivables being factored. This amount can depend on a number of things, including the industry your business operates in, amount of receivables being factored, quality of your customers and the average number of days outstanding in receivables.

What is the cost of factoring receivables?

As the factoring company takes a risk when taking on account receivables it charges a fee. The fee will vary depending on the provider and these fees are often negotiable.

The costs will depend on the services required and these can be broken down into the following:

  • Discount charge - this will vary but can range from 0.5% to 5% and is calculated on the value of the invoice

  • Credit Management fee - this is the cost for credit checking the buyer along with any administration costs associated with providing the service

  • Credit protection fee - this will only apply if you have chosen non-recourse factoring where the lender takes the risk for non-payment

  • Notice period to end the service - this can vary but all charges must be paid during this notice period time​

Why choose Novuna as your accounts receivable factoring company?

6 month trial period

A 6 month trial period so you can be sure the product is right for you, followed by a 6 month rolling contract – we don’t tie our clients in for long periods.

Digital onboarding

We are the first in the market to offer a digital onboarding process and have been leading the way with our digital capabilities allowing clients to sign up within 24 hours from the first appointment.

Client trust account

Once you become a client you will be given your own trust account, meaning you will get same day availability on your funds. You can also view all of your invoices and payments online at a time suitable to you, 24/7.

No uncleared effects

We have heavily invested in our digital capabilities. This includes the auto allocation of payments using Artificial Intelligence. Ultimately this advance in technology means that our clients access money quicker as well as saving money on interest charges due to auto allocation.

Simple pricing

We aim to make the process of Cash Flow finance as simple and straightforward as possible. Our pricing is very straightforward to understand. For a no obligation quote or an informal chat you can call our friendly team today on 0808 250 0859.

Award winning service

We offer award-winning client services and individual Relationship Managers who are on the other end of the phone or out in the field to visit you in person.

We are an award winning factoring provider

Alternative SME Lender of the Year 2023

SME Lender of the Year 2023

Best Use of Technology 2023

Best Provider 2023

Commended SME Finance Innovation 2023

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Our factoring service is highly recommended by our customers

"The communication and support has been outstanding. Providing me with all the information I needed regarding new clients coming onto our books. The system they use is so user friendly and the drawdown payments are very efficient in the fast moving world of temporary payroll."

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Accounts receivable factoring has been revolutionised with our digital onboarding process

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Get in touch

Contact our friendly UK advisors on our freephone

0808 250 0859

8:45 - 17:15 - Monday to Thursday &
8:45 - 16:45 - Friday

Accounts receivable factoring FAQs

Is factoring receivables a good idea?

If you are a business that is experiencing cash flow shortages or is fast growing and cannot access bank loan financing, if you are a start up or have bad credit or you just need access to quick cash in order to maintain operations or invest in growth then factoring receivables may be a good idea for you.

Maintaining cash flow is essential to the success of a business and by selling your receivables to a factoring company you can gain quick access to cash without the requirement of assets or by committing to long term agreements.

The costs of factoring differ but it can help maintain and grow your company whilst also removing some of the issues around collecting your receivables.

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How do you calculate receivables factoring?

The factors fees will usually be calculated as a percentage of the value of the invoice that has been sold to them by a business, around 0.5 to 5%.

This amount will be deducted from the second instalment of cash that is paid to the business once the factor has received full payment of the invoice.

The first instalment is the advance received by the borrower straight away, around 80% of the invoices value.

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How does Factoring AR work?

Factoring AR is the sale of a business’s accounts receivables to a factoring company to provide a quick boost to their working capital. An advance will be received from the factor of around 80% of their value. The factor then will chase up payment and on receipt of the full amount will pay the remaining balance to the borrower minus their fee.

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Why is factoring receivables beneficial to a seller?

The benefit to a seller of factoring its receivables is that it receives cash on unpaid invoices sooner enabling it to support its ongoing operations. It passes on the responsibility of the invoices to the factoring company along with its associated costs around billing and accounting.

It saves time that would otherwise be spent on managing collections and monitoring credit worthiness of your buyers. It is more flexible and less expensive than other forms of borrowing.

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Want to learn more about how you can boost your businesses cash flow?

Our Cash Flow Resource Hub has been set up to help SME's with cash flow finance advice, tips and resources to help with their cash flow position.

We explore ways you can begin improving your cash flow situation and start getting your business on track to positive cash flow.

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