A haulier in Hull runs four lorries for a food distributor. The work is steady and the margin is acceptable. The distributor pays on ninety days from month end, which means a job done on 2 March is paid at the end of June. Drivers are paid weekly, fuel is paid on account, and the vehicle finance goes out on the 15th regardless.
The business is profitable and it cannot pay itself. That gap is precisely what invoice finance is sold to close, and it is worth understanding what you are buying before you sign a two-year agreement.
Factoring hands over the ledger, discounting does not
Both products advance you a percentage of an invoice's value as soon as you raise it, typically 80% to 90%, and pay you the balance less charges when the customer settles. The difference is who collects.
With factoring, the finance company owns the sales ledger. Your invoice carries a notice of assignment telling the customer to pay the factor directly, and the factor chases. That is why factoring is easier to obtain for a young business: the provider is underwriting your customers' willingness to pay rather than your own credit control. It also means your customers know.
With invoice discounting, you keep the ledger and do your own collections, and the facility can be confidential, so the customer never learns the invoice has been financed. Providers want a proper finance function and audited or reviewed figures before they offer it, which usually means a turnover threshold and a couple of years of trading.
Selective or spot factoring sits alongside these: you finance individual invoices rather than the whole book. The per-invoice cost is higher, the commitment is far lower, and for a business with one slow-paying customer and the rest on thirty days, it is often the sensible shape.
The headline rate is not the cost
Two charges run at once. The discount charge is interest on the money advanced, quoted as a margin over the Bank of England base rate and charged daily on the balance drawn. The service fee is a percentage of your gross turnover, charged whether or not you draw anything, and it pays for the ledger management and credit control.
The service fee is where the real money is. A facility quoted at base plus 3% with a 1% service fee does not cost you base plus 3%. If your customers pay in sixty days, that 1% of turnover is charged for sixty days of use, so annualised against the advance it is worth roughly six times its headline value. Add an arrangement fee, an audit fee charged per visit, a refactoring or disapproval charge on invoices that age past the recourse period, a minimum monthly fee that bites in quiet months, and a charge per transmission or per invoice, and the effective annual cost of the money can comfortably reach the high teens or above.
Ask any provider for the total charges on a worked example of your actual ledger over twelve months, in pounds, and compare that against the pounds of interest on an overdraft of the same average size. The comparison is often uncomfortable and occasionally still favours the invoice facility, because an overdraft of that size may not be available to you at all.
Recourse means the risk came back to you
Almost all facilities are with recourse. If the customer has not paid within a set period after the due date, commonly ninety or one hundred and twenty days, the provider takes the advance back out of your account. You carry the bad debt, having already spent the money.
Non-recourse facilities, or facilities with bad debt protection bolted on, shift some of that risk for an extra percentage. Read what is excluded: cover is normally against the customer's insolvency, not against a customer who simply refuses to pay because of a dispute. A disputed invoice is disapproved, the advance is clawed back, and the protection does not respond.
Watch the concentration limit too. Providers cap how much of your funded ledger can sit with one debtor, often at 25% or so. A haulier with one big customer may find that the single invoice he actually needs financed is the one that breaches the limit.
Your customers may already have an opinion
Disclosed factoring changes the relationship. Some buyers, particularly larger ones with their own purchase ledgers, are entirely used to it and it costs you nothing in goodwill. Others read a notice of assignment as a sign that their supplier is short of money, and start wondering whether the supplier will still be there in six months. In some trades it is normal. In others it is a signal.
There is one obstacle that used to stop facilities dead and mostly does not now. Large customers often wrote clauses into their supply contracts prohibiting the supplier from assigning receivables, which made the invoices unfinanceable. The Business Contract Terms (Assignment of Receivables) Regulations 2018 render most of those clauses ineffective for small and medium suppliers, with carve-outs for certain sectors and for larger firms. If a customer's contract still says you cannot assign, the clause may not bite.
Getting out is harder than getting in
The sales conversation is about the advance rate. The exit is in the small print, and it is the part to negotiate before you sign.
Look for the minimum term, often twelve or twenty-four months, and the notice period to terminate, often three months and sometimes longer. Look for a termination fee, and for a minimum service fee that continues to accrue through the notice period whether or not you are using the facility. Understand that moving to another provider means the new one buys out the old one's book, and the old one's closing statement is a number you will not enjoy.
There is also a structural point. Once you have taken the advance on your whole ledger, that money is spent and the facility is funding your working capital permanently. Coming off it means finding the equivalent of sixty days of sales in cash, which is exactly the thing you did not have when you started. Invoice finance is easy to enter and expensive to leave, so treat it as a decision about the shape of the business rather than a fix for one bad quarter.
Where this shows up in the game
Business Baron models the cash cycle rather than the profit and loss account, so the ninety-day debtor is a real problem with real options. You can take invoice finance and watch the fees eat the margin on work you were pleased to win, or refuse it and turn down the contract that would have broken you. Customers react to a disclosed facility differently depending on the trade and the era. Learning this in a game costs considerably less than learning it with a real factor.