Advantages & disadvantages of factoring for UK SMBs

Factoring gives companies access to the funds they’re owed today, before customers actually pay. It’s the standard practice for most small businesses that want to accelerate their cash conversion cycles.

Factoring gives companies access to the funds they’re owed today, before customers actually pay. It’s the standard practice for most small businesses that want to accelerate their cash conversion cycles.

Factoring gives companies access to the funds they’re owed today, before customers actually pay. It’s the standard practice for most small businesses that want to accelerate their cash conversion cycles.

Henrik Grim

Co-founder & CEO

Factoring gives companies access to the funds they’re owed today, before customers actually pay. It’s the standard practice for most small businesses that want to accelerate their cash conversion cycles. 

But the idea is often much better than the execution. The system in the UK today is messy. There’s a scattered range of providers from big banks to small specialists with complex terms, little regulation, slow systems, and plenty of fees

All of which makes accessing this useful tool harder than it should be.

This article looks at the benefits and disadvantages of factoring for SMBs, and how we see this changing in the (hopefully) near term.

What is factoring?

Factoring lets you sell unpaid receivables (outstanding invoices) to a third party, in exchange for cash today. It’s commonly called invoice discounting in the UK, and also known as debt factoring or invoice financing. 

For companies with long payment terms and in need of short-term liquidity, this is an attractive concept. Yes, you give some of your profit to a third party, but you get the capital you need now

It’s also particularly appealing if you’re not specialised in collections, or if you want a pesky unpaid invoice off your hands. Hand it to a third party for them to worry about.

Factoring vs invoice financing

For the purposes of this article, we won’t worry too much about the difference between these. Both bring in money against outstanding invoices. But there is a slight distinction: 

  • Factoring: You hand outstanding invoices to a third party in exchange for a percentage of the total value. When each invoice is fulfilled, the third party gives you the remainder, minus a transaction fee. And the third party chases payment from your customer.

  • Invoice financing: The third party advances you 70-90% of the value of the relevant receivables up front, and the remainder (minus a fee) once the invoice has been paid. It’s essentially a loan, using your accounts receivable as collateral. Crucially, you still handle the collections from clients. And you’re liable if they don’t pay up.

Which you prefer depends on the provider, your own processes, and how seriously you take some of the pros and cons of factoring overall. Let’s look at those now. 

Advantages & disadvantages of invoice discounting

We’ll look at the specific options in the UK shortly. But first, why might you be interested in using factoring for your business? 


Just some of the reasons why you might explore factoring include:

  • Quick access to funds. You only consider factoring if you want or need cash sooner than you expect to receive it from customers. 

  • More predictable income. You can’t always ensure that a client will pay on time and in full, but you know up front how much you’ll receive through factoring. 

  • A shorter cash conversion cycle. You’re turning expected (future) revenue into cash today. Which shortens the whole cycle from money out to money in. 

  • The opportunity to outsource collections. You may not have a robust collections process, which can make chasing customers an exhausting and emotionally draining experience. Factoring puts specialists in charge of this. 

  • Customer credit checks. This is more of a secondary benefit. Because factors will credit check your customers and review outstanding invoices, you’ll quickly learn whether some clients deserve more scrutiny next time.

But there’s no such thing as a free lunch, and there are some very good reasons why factoring doesn’t suit everyone. 


Why might you not use factoring for all outstanding invoices?

  • Reduced profits. You give a portion of each invoice to the factor. Which obviously impacts your profit margin.

  • High rates. The actual impact on profits can be significant. In many cases, a line of credit may be a cheaper way to tide you over until customers pay. 

  • “All or nothing” criteria. Many providers will want to finance all your receivables, rather than a select few. This means you pay fees across the board, and in turn reduces profits

  • It takes work. While some factoring services are relatively efficient, it can still involve a lot of work. It’s very rarely a one-click process.

  • There are a lot of providers - regulated and not. It may be hard to know who to trust.

  • Impact on customer relationships. Customers may not like being chased by third parties. If you’re worried, invoice financing may be a better option than factoring.

Factoring for UK small businesses

So what does the factoring landscape look like in practice? UK small businesses have two main options for invoice discounting. 

Traditional banks

Many large and boutique banks offer factoring services for UK small businesses. The upside is they’re banks - they have clear systems and practices. For the most part, banks are predictable. 

Factoring services themselves are not regulated, which can be daunting for small business owners. But banks are. This may be reassuring for the risk averse. 

Plus, you may already be using them for a bank account or loans, so extending to a new service could be simple. 

Or you may hate your bank. One of our customers described a situation that involved a mountain of paperwork and three months to set up a simple factoring facility. They slogged through this process, only to have the terms change (for the worse) without any warning. 

That small business owner could only describe their bank as “the devil.”

Unregulated factoring providers

Technically they’re “self-regulated,” but factoring companies do come under the supervision of UK Finance, FCA and NACFB - these cover financial services in the UK.

These providers exist because the banks fall short in some way. Some may be specifically designed to “disrupt” traditional banking services, and thus can be faster, easier to use, and more dynamic

They can also be specialised in specific industries or business models. Or they’ll have tools and apps that integrate with your existing business tech stack.

Finally some may charge more competitive rates.

But in essence, they’re offering a similar service to the traditional banks. Together, these two players represent the factoring options for UK small businesses today.

How to improve this system

Factoring in theory is a really valuable tool. But most companies hate the process, particularly with large banks.

Part of the challenge is that accounts payable and receivable are handled separately in most companies. The money going out isn’t related to the money coming in. And because it can take three months or more to actually secure the funds, you may not have access to credit when you need it most. 

At Mimo, we believe that a few key changes need to happen.

1. Make accounts payable and receivable the same process

These are the two sides of the cash conversion coin: money in and out. If you can manage them together - in the same tools and process - you have a complete understanding over your cash flow. And you can quickly generate incoming funds through a service like factoring, take a line of credit, or generate cash another way.

Ideally you’d also have the same people handling both ends. Whether that’s the founder or the finance team, it pays to have someone looking at cash flow holistically.

2. Allow for real-time factoring

Working capital management is best when you can react dynamically to your current cash flow situation. If you know that a large payment will be late - and you need those funds - you should be able to secure funding quickly and easily. 

You could even pre-approve a factoring deal, ready to execute the moment you need it. 

Many agreements require you to factor all (or a large share) of your receivables, often far more than you’d prefer. Factoring really needs to be more dynamic, based on need. 

3. Automate as much as possible

One reason why real-time factoring is difficult is that companies are still processing invoices (in and out) manually. That means individual email reminders to clients, entering data into accounting tools, and reconciling payments line by line. 

Automate these steps, speed up the process, and focus your energy on optimising cash flow. This is really the only way to have a real-time overview of your cash position. 

4. Defragment these systems

Today, you have a web of tools and processes to handle money in and out of the business. A factoring agreement is one more moving part. 

Ideally, we’d bring all of these together. You’d be able to monitor, control, and forecast cash flow, and then secure invoice financing or a working capital facility to pay suppliers the moment you need to.

How Mimo can help

Today, Mimo offers easy access to working capital facilities (credit) for just this reason. Instead of a lengthy wait for a bank loan or factoring agreement, we advance credit right away. So you can pay suppliers now or up to 60 days later - your choice. 

Next, we’re adding accounts receivable tools to help you get paid faster. Which means you’ll have accounts payable and receivable in the same platform. So you’ll have a complete overview of all money in and out. 

You’ll be able to raise credit against those receivables in Mimo, so no need for third party factoring services. You can make instant decisions and optimise your working capital, which is so critical for growing businesses.

Factoring is a good (but not yet great) option

Despite its many issues, invoice discounting (factoring) is a smart and necessary choice for many UK small businesses. It gives you cash today that you’d otherwise wait weeks or months to receive.

But the system is far from perfect, with some obvious flaws. A more responsive, strategic, and ideally automated factoring approach would be better for UK businesses.

That’s what we’re building towards at Mimo, and hopefully the rest of the finance industry has similar goals.

See how we’re already automating invoice management at Mimo, the exciting developments on the way, and let us help you master working capital.

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Effortless business payments, with
credit built-in. Get started today.