TL;DR: Invoice factoring is often preferred by smaller businesses because it provides immediate cash flow alongside a professional credit control service. While asset-based lending offers higher funding limits by using multiple assets, factoring is generally more accessible for growing companies without significant machinery or property. However, businesses should be aware that factoring involves higher visibility to customers and can be more expensive than traditional loans.

Why choose invoice factoring over asset-based lend facilities?

Managing cash flow is one of the most significant challenges for UK business owners. When a company sells goods or services to another business, they often have to wait 30, 60, or even 90 days for payment. This delay can stifle growth and make it difficult to meet daily operational costs. To bridge this gap, many firms look toward invoice finance or asset-based lending (ABL).

While both options use business assets to secure funding, they serve different strategic purposes. Understanding why you might choose invoice factoring over asset-based lend options requires a look at your business size, your internal resources, and your long-term goals. Generally, factoring is seen as a “service-plus-finance” package, whereas ABL is a more complex, holistic funding structure for larger enterprises.

The fundamental difference between factoring and ABL

To understand the choice, we must first define the two products. Invoice factoring is a form of invoice finance where you sell your unpaid invoices to a third-party provider (the “factor”). The factor pays you a large percentage of the invoice value immediately and then takes over your sales ledger management, including chasing your customers for payment.

Asset-based lending (ABL) is a broader category. While it includes the value of your invoices, it also looks at other items on your balance sheet, such as inventory (stock), plant and machinery, and even commercial property. ABL providers typically offer a revolving credit line based on the total value of these combined assets.

If you are considering these options, a lender will likely review your financial history. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

Reasons to choose invoice factoring

There are several specific scenarios where invoice factoring may be the more appropriate choice for a UK business. These usually revolve around the need for simplicity, administrative support, and speed of access.

1. Outsourced credit control

One of the primary reasons businesses choose factoring is the “factoring service” itself. Smaller companies often lack a dedicated accounts receivable department. By using a factor, you effectively outsource your credit control. The factor’s professional team will handle the debt collection process, sending reminders and making phone calls to ensure invoices are paid on time. This allows you to focus on core business activities like sales and production.

2. Accessibility for SMEs and startups

Asset-based lending typically requires a business to have a diverse range of assets and a significant annual turnover, often exceeding £1 million or £2 million. Invoice factoring, however, is much more accessible. Even a relatively new startup with a few high-quality business-to-business (B2B) customers can qualify. Because the primary security is the invoice itself (the promise of payment from your customer), your company’s own balance sheet strength is sometimes less critical than the creditworthiness of your clients.

3. Scalability with sales

Factoring is directly tied to your sales volume. As you win more contracts and issue more invoices, the amount of funding available to you automatically increases. While ABL is also flexible, the inclusion of “slower” assets like machinery or property means the credit limit doesn’t always fluctuate as quickly or as smoothly as a pure invoice-linked facility.

4. No need for fixed assets

Many modern businesses, especially in the service, tech, or recruitment sectors, do not own heavy machinery, large fleets of vehicles, or warehouses. Their most valuable assets are their invoices. For these companies, an ABL facility would offer little more than an invoice finance line anyway. Factoring provides a straightforward way to unlock value without needing a warehouse full of stock to secure a loan.

Comparing costs and control

While factoring offers convenience, it is important to weigh the costs. Factoring fees are generally split into two parts: a service fee (for managing the ledger) and a discounting fee (the interest on the money drawn). Because of the administrative work involved for the factor, these fees may be higher than those associated with asset-based lending or invoice discounting.

Furthermore, factoring is “disclosed.” This means your customers will know that you are using a finance provider, as they will pay the factor directly. Some businesses worry this may affect their reputation, though in most UK industries, factoring is a very common and accepted business practice. In contrast, ABL and invoice discounting are often “confidential,” where the customer remains unaware of the lender’s involvement.

The risks involved in business finance

All forms of business borrowing carry risk. It is vital to remember that these facilities are secured against business assets. If you use your property or other business assets as security, your property may be at risk if repayments are not made. Defaulting on a business loan could lead to legal action, repossession of assets, increased interest rates, and additional charges.

In invoice factoring, the risk often lies in “recourse.” If your customer fails to pay the invoice (perhaps due to insolvency), the factoring company may seek to “claw back” the money they advanced to you. You can mitigate this by choosing “non-recourse” factoring, which includes credit insurance, though this typically comes at a higher cost.

Is Asset-Based Lending ever better?

While factoring is excellent for SMEs, larger businesses with complex balance sheets might find ABL more efficient. If you need a very large injection of capital for an acquisition or a major turnaround, the ability to borrow against your stock and equipment alongside your invoices can provide a much higher total funding limit. However, for the majority of growing UK firms looking for cash flow support, the simplicity of factoring is hard to beat.

For more information on different types of business support and regulations, you can visit the UK Government’s business finance support finder for a range of credible resources.

People also asked

What is the difference between factoring and invoice discounting?

The main difference is who manages the sales ledger. In factoring, the lender manages the collections and the customers are aware of their involvement, whereas in invoice discounting, the business retains control of its own credit control and the facility is usually confidential.

Is invoice factoring expensive?

Factoring can be more expensive than traditional bank loans because you are paying for both the capital and the service of credit management. Fees typically range between 0.5% and 5% of your turnover, depending on the volume of invoices and the credit risk of your customers.

Can a new business get invoice factoring?

Yes, many factoring companies work with startups. Since the facility is secured against the invoices of your customers, a lender is often more interested in the credit strength of your clients than your business’s long trading history.

What happens if a customer doesn’t pay an invoice in a factoring agreement?

In a “recourse” agreement, you are responsible for the debt and must pay the factor back if the customer defaults. In a “non-recourse” agreement, the factor takes the risk, usually because they have taken out credit insurance on your behalf.

Does factoring affect my credit score?

Setting up a factoring facility involves a credit search, which may appear on your record, but the facility itself can actually help your credit standing by providing the cash flow needed to pay your own suppliers on time.

Conclusion

Deciding why to choose invoice factoring over asset-based lend arrangements depends on the specific needs of your company. If you are a growing SME that wants to save time on credit control and doesn’t have a wide array of physical assets like property or machinery, factoring is a highly effective tool. It provides a flexible, scalable source of working capital that grows in tandem with your sales.

However, it is essential to review the terms carefully. Consider the impact of disclosed collections on your customer relationships and ensure you understand the costs involved. By choosing the right partner, you can turn your unpaid invoices into a powerful engine for business growth while protecting your company’s financial health.