Can Invoice Factoring Replace My Credit Controller?
Disclosed factoring effectively outsources credit control to the provider. Many businesses with turnover under £3m use this to avoid hiring a dedicated credit controller (£35,000-£55,000 fully loaded). Above £3m turnover, an in-house credit controller plus invoice discounting is usually cheaper and gives more control.
Why This Matters
For UK SMEs turning over £500k to £5m, the credit control function sits in an awkward middle ground. Too small to justify a full-time credit controller (£28,000-£42,000 salary plus overheads, totalling £35,000-£55,000 annually), but large enough that late payments cause genuine cash flow pain.
Disclosed factoring can replace this entire function because the factor takes legal ownership of your sales ledger, contacts customers directly, and pursues payment. They're motivated because they've already advanced you 80-90% of invoice value. However, this comes at a cost: a service fee (typically 0.75-2.5% of turnover) plus interest on funds drawn, and you surrender control over customer relationships.
The decision hinges on three variables: your turnover level, whether customers will accept third-party collections, and whether credit control is a strategic capability or administrative overhead in your business model.
Key Points
- Disclosed factoring completely replaces credit control because the factor legally owns your invoices, contacts customers in their own name, and manages collections, pursuing late payers through their own processes
- Below roughly £3m turnover, factoring is often cheaper than employing a credit controller (£35,000-£55,000 loaded cost); above £3m an in-house controller plus invoice discounting often costs less. The crossover depends on your fee rate and invoice volume, so run your own numbers
- Service fees run 0.75-2.5% of turnover depending on invoice volume and debtor concentration, so a £2m turnover business pays £15,000-£50,000 annually versus £40,000+ for an employee
- Confidential invoice discounting keeps credit control in-house, you chase your own customers and the lender simply advances against approved invoices, giving you control but requiring internal resource
- Sectors where disclosed factoring works well include recruitment (agencies already deal with multiple financiers), trade distribution, and manufacturing where customer relationships are transactional rather than consultative
- Factoring provides professional collections expertise and economies of scale, larger factors like Close Brothers or Bibby Financial Services employ specialist teams with legal support that small businesses cannot replicate
- Loss of control is the primary trade-off: the factor decides when to escalate late payers, customers know a third party is involved, and you cannot offer flexible payment terms without factor approval
Illustrative example
Hypothetical: a Birmingham-based IT support company turning over £1.8m annually was spending £42,000 on a part-time credit controller (3 days per week) plus accountancy software. Average debtor days were 52, with 18% of invoices over 60 days old.
They switch to disclosed factoring with an independent factor at a 1.8% service fee plus 2.5% over base rate on funds drawn. Total annual cost £38,400 (£32,400 service fee plus approximately £6,000 interest). Against the £42,000 credit control cost, the net saving is about £3,600 a year. The bigger gain is time: with the factor's collections team chasing invoices, the owner no longer manages credit control, and faster contact with customers can bring debtor days down.
Common Pitfalls
- Assuming all factoring includes full credit control: confidential invoice discounting leaves collections entirely with you, requiring the same internal resource as traditional invoicing but with faster cash access
- Underestimating customer relationship impact: in consultative sectors like architecture, marketing, or bespoke manufacturing, customers may view third-party collections as unsophisticated or a sign of financial distress
- Comparing only headline costs: a £35,000 credit controller also handles queries, reconciliations, and dispute resolution, while basic factoring only covers collections (you still need someone to manage the facility)
- Choosing factoring purely to avoid bad debt risk: factors typically offer non-recourse (bad debt protection) as an add-on costing another 0.3-0.8% of turnover, and they won't cover disputes or contra charges
- Ignoring the lock-in: factoring agreements typically require 6-12 months' notice and charge exit fees if you want to bring credit control back in-house, making it difficult to reverse the decision cheaply
What to Do Next
- Calculate your current credit control cost honestly: include salary, employer NI (15% above the secondary threshold), pension (minimum 3%), recruitment, training, software subscriptions (Xero, Chaser, etc.), and management time, typically £38,000-£58,000 for a £30,000 salary position
- Request disclosed factoring quotes from three providers (e.g. Aldermore, Ultimate Finance, Novuna Business Finance) specifying your turnover, typical invoice value, debtor concentration, and whether you need non-recourse protection, quotes should break out service fees and finance charges separately
- Test customer acceptance by reviewing your contracts for any anti-assignment clauses (common in public sector and large corporate contracts) and informally asking 2-3 key customers whether they would accept invoices from a third-party factor
Related Questions
What is confidential invoice discounting and how does it differ from factoring?
Confidential invoice discounting provides cash advances against invoices (typically 85-90%) but you retain full control of your sales ledger and customers are not notified. You continue chasing payments yourself and repay the lender when customers pay you. It requires proven credit control capability and usually minimum £750,000 turnover. Service fees are lower (0.2-0.6% of facility) because the lender does less work, but you still need internal resource to manage collections.
Do factors guarantee payment even if my customer goes bust?
Not automatically. Standard factoring is 'recourse', meaning if a customer does not pay within 60-90 days you must buy back the invoice or it is offset against future advances. Non-recourse factoring (bad debt protection) costs an additional 0.3-1% of turnover and only covers customer insolvency, not disputes, contra charges, or quality issues. Providers like Bibby Financial Services and Close Brothers assess each debtor's creditworthiness before approving non-recourse cover.
Can I use factoring for some customers and keep credit control in-house for others?
Rarely. Most factoring agreements require you to assign all trade debts (whole turnover facility) to prevent cherry-picking easy-to-collect invoices and leaving slow payers with the factor. Selective invoice finance exists but typically costs 30-50% more and requires minimum invoice values of £5,000-£10,000. If you only want to outsource collections for problem customers, specialist debt collection agencies charging 10-25% of recovered amounts are more suitable than factoring.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam is the founder and managing director of Muswell Rose and a founder of Best Business Loans Ltd, the company behind Market Invoice. He spent over three years as managing director of Penny, a UK invoice finance business, and his career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library.
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