How Does Credit Control Work With Factoring?
With invoice factoring, the provider manages your credit control. They contact your customers, chase late payments, send reminders, and collect funds. This saves you time but means your customers know you use a factoring company. With invoice discounting, you retain credit control yourself.
Why This Matters
Credit control determines who manages the collection of money owed to your business, and this directly affects customer relationships, administrative workload, and cash flow timing. In factoring, the finance provider takes over this function entirely, contacting your customers under their own name or yours to collect payment.
This outsourcing can free up hours of chasing each week but makes your financing arrangement visible to customers. The alternative, invoice discounting, keeps collections in-house and confidential.
Key Points
- The factoring company contacts your customers directly, issues payment reminders on an agreed schedule once invoices fall overdue, and handles all collection calls and correspondence
- Collections happen under either the factor's name (disclosed factoring) or your business name with instructions to pay the factor's bank account (invoice factoring)
- Most UK factors charge 0.5-3% of invoice value as a service fee, which includes full credit control, sales ledger management, and debtor reporting
- You receive weekly or daily reports showing which invoices are paid, overdue, or disputed, giving you visibility without the administrative burden
- Factors typically chase payment more systematically than stretched internal teams because their advance is at risk, which can shorten average collection times
- If you want to retain credit control completely, invoice discounting keeps collections confidential but requires you to maintain your own credit control resources
- Some providers offer hybrid models where you handle initial contact and they escalate accounts that stay overdue past an agreed point
Illustrative Example
Hypothetical: a Birmingham engineering firm with £800,000 annual turnover spends 12 hours a week chasing payments from five major construction customers on 60-day terms, time the owner would rather spend on winning work.
After moving to factoring with a bank-owned provider, the provider's credit control team takes over collections and average payment time shortens by about a week. The owner puts most of those 12 hours back into business development. Customers initially question the new payment instructions but accept the explanation that it was a normal financing arrangement.
One longstanding customer asks about the company's financial stability and needs reassurance that factoring is a growth tool rather than a distress measure. This is an illustrative scenario, not a real client case.
Common Pitfalls
- Assuming customers will react negatively when many UK businesses now expect suppliers to use invoice finance and view it as professional rather than problematic
- Failing to notify customers properly about the change, leading to confusion, misdirected payments, and delayed funds when invoices are paid to your old bank account instead of the factor's
- Not reviewing the factor's collection approach before signing, then discovering they use aggressive tactics that damage customer relationships in your specific sector
- Losing touch with customer payment patterns because you no longer speak to accounts payable teams, missing early warning signs of customer financial difficulty
- Choosing factoring when you have complex customer queries requiring technical knowledge that external credit controllers cannot handle effectively
What to Do Next
- Request sample collection letter templates and call scripts from potential factors to assess whether their tone matches your customer relationship style
- Ask how factors handled credit control for existing clients in your sector, including average debtor days achieved and any customer complaints received
- Clarify the escalation process for disputes, queries, or customers claiming non-delivery, ensuring you remain involved in resolution rather than purely delegating
- Compare the all-in cost of factoring (discount fee plus service fee) against your current internal credit control costs, including staff time, software, and bad debt provisions
- If customer perception is critical, request confidential invoice discounting quotes, where you retain full credit control visibility
Related Questions
Can I stop the factor contacting specific important customers?
Most factors allow you to exclude certain customers from their credit control process through selective invoice discounting, where you fund some invoices through factoring and manage key accounts yourself. However, this typically reduces your total available funding and may increase fees because the factor loses economies of scale. You cannot usually cherry-pick within a standard factoring agreement as factors require whole turnover to manage credit risk.
What happens if a customer disputes an invoice after the factor has advanced me funds?
The factor will typically freeze further advances until the dispute resolves. If the invoice is invalid due to faulty goods or service failures, you must repay the advance received plus fees. If the dispute is simply a customer delay tactic, the factor pursues collection and you keep the funds. The unadvanced balance of each invoice (the retention) acts as a buffer held back to cover potential disputes and ensure factors are not out of pocket during resolution periods.
Do factors report my customers to credit agencies if they pay late?
UK invoice finance providers do not typically report individual late payments to Experian or Equifax as this would damage customer relationships and reduce collectability. However, if an invoice becomes seriously overdue beyond 120 days and the factor suffers a loss, they may register this commercially. Most factors focus on relationship-based collection rather than credit file threats, as their goal is maintaining ongoing business flow rather than one-off debt recovery.
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.
Last updated: