How much does invoice factoring cost?

Invoice factoring usually costs between 1% and 5% of the total value of the invoices you factor. But that headline figure doesn't tell the whole story. The actual amount you pay depends on 2 main charges - a service fee and a discount rate - plus a handful of additional costs that vary between providers. Let’s go over how it all works.

What fees are involved in invoice factoring?

There are two primary charges that come with invoice factoring: the service fee and the discount rate. Most providers will also have a smaller set of additional fees depending on the facility and how it's structured.

Service fee

The service fee covers the factoring company's work in managing your sales ledger and chasing payment from your customers. It's usually charged as a percentage of the total invoices factored - usually somewhere between 0.5% and 3% of invoice value. The exact rate depends on your industry, the volume of invoices you're putting through the facility and the creditworthiness of your customers.

Discount rate

The discount rate is the interest charge on the funds advanced to you. Once a factoring company advances you a percentage of an invoice's value - usually around 70% to 90% upfront - they charge interest on that advance until your customer pays. This is usually expressed as an annual rate (usually 1.5% to 5% per annum) but charged daily or monthly on the outstanding balance.

This means the longer your customers take to pay, the more the advance costs you. It's an important detail when comparing providers and when assessing the real cost of factoring against other finance options.

Additional charges

Not all providers charge all of these invoice factoring charges, but it's worth asking about:

• Setup or arrangement fees - a one-off charge to set up the invoice factoring.

• Monthly administration fees - some providers charge a flat monthly amount on top of the percentage-based fees.

• Audit fees - some lenders will periodically audit your sales ledger and charge for this.

• Credit check fees - if  the factoring company assesses your customers' creditworthiness before advancing funds.

What affects the cost of invoice factoring?

There are a few different things that affect the rate you're offered when it comes to invoice factoring:

• Invoice volume - the more you factor, the better your negotiating position. Higher volume can mean lower rates.

• Customer credit quality - if your customers are large, well-established businesses with strong payment histories, the factoring company's risk is lower and rates might be better.

• Business sector - some industries are considered higher risk (construction, for example, due to complex payment terms). This can push rates up.

• Trading history - newer businesses or those with a limited track record may face higher rates.

• Whole-ledger vs selective factoring - whole-ledger arrangements (where you factor all your invoices) typically attract lower rates than selective factoring (where you choose individual invoices to factor).

• Facility duration - longer-term arrangements often come with more favourable pricing.

Recourse vs non-recourse factoring: how does it affect cost?

This distinction is important when comparing providers, yet it often gets overlooked. With recourse factoring, if your customer doesn't pay the invoice, the debt comes back to you. The factoring company advances the funds but doesn't carry the credit risk.

With non-recourse factoring, the factoring company takes on that risk. If your customer can't pay - due to insolvency, for example - the lender absorbs the loss rather than reclaiming the funds from you.

Non-recourse factoring costs more, because the provider is taking on greater risk. Whether that premium is worth paying depends on the creditworthiness of your customers and your own appetite for risk. It's an important consideration when comparing providers — like-for-like comparison requires knowing which type of arrangement you're looking at.

How to reduce your invoice factoring costs

1. Get at least 3 quotes from different providers - compare the total cost, not just the headline rate.

2. Factor selectively where possible - if you only have a cash flow gap around specific invoices or customers, selective factoring can help to manage fees.

3. Improve customer credit quality - onboarding customers with stronger payment records reduces the risk for the provider and can support better rates over time.

4. Negotiate the discount rate - once you have a track record with a provider, find out if there’s wiggle room in the discount rate.

5. Increase your volume - if you're growing and factoring more invoices, use that leverage when it comes to renegotiating your terms.

Is invoice factoring worth the cost?

It can be, but it depends on your situation. Obviously it converts unpaid invoices into immediate cash, which can be the difference between meeting payroll and missing it. It removes the stress of chasing payment and can support growth.

However, the costs can add up, especially if your customers are slow payers and the discount rate runs for longer. You also hand over credit control to a third party, which some business owners find uncomfortable.

Before committing to factoring, consider how it differs from invoice discounting. Discounting lets you keep control of your credit function while still unlocking cash from unpaid invoices.

Factoring can be a useful bridge, but addressing the root cause through how to get invoices paid on time can be better. 

What are the alternatives to invoice factoring?

While factoring can bridge a cash flow gap, handing over your sales ledger isn’t the only way to keep capital moving. If you'd rather keep control of your customer relationships and avoid scaling fees, there are more straightforward funding options to consider.

• Business loans: For significant investments, expansion, or a predictable working capital injection, an unsecured business term loan can offer a simpler arrangement and access to larger sums. With a standard business loan, you receive a lump sum upfront and repay it over a fixed term, typically up to 6 years.
  
  

• Line of credit:  If your cash flow gaps are short-term, such as paying suppliers while waiting for a big client invoice to clear, a revolving line of credit like FlexiPay can help you spread the cost over 1 to 12 months for a simple flat fee per use.
  
  

• Cashback business credit cards: For everyday business spending, travel, or immediate supplier payments, a dedicated business credit card provides instant purchasing power. Cards like the Funding Circle Cashback credit card also reward your spending, with 2% cashback for the first 6 months, up to £2,000, then 1% uncapped cashback on everything you spend after that.

FAQs

What is a typical invoice factoring rate in the UK?

Most UK businesses can expect to pay between 1% and 5% of the invoice value in total charges, combining the service fee and discount rate. The exact figure depends on your sector, invoice volume, customer credit quality and whether you choose recourse or non-recourse factoring.

Is invoice factoring more expensive than a business loan?

It depends on how you use it. A fixed-term business loan has a predictable total cost. Invoice factoring costs scale the more you use it. For businesses with a consistent, high volume of invoices, factoring can be competitive. For one-off or occasional funding needs, a business loan can be more straightforward.

Are invoice factoring fees tax deductible?

Generally speaking, the fees charged for invoice factoring are considered a business expense and are therefore deductible against taxable profits. However, this can depend on how your accounts are structured, so it's worth confirming the position with your accountant or professional adviser before making assumptions.

02/07/26: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial, tax or legal advice. Readers should seek independent tax advice from a qualified professional. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.