Short answer: Invoice factoring raises cash against your sales ledger (often by assigning invoices). Debt collection chases a specific unpaid B2B invoice for commission, usually without buying the debt. Pick finance for working capital; pick collection for a stuck commercial file.
Invoice factoring (and related invoice finance) is a way to raise cash against your sales ledger — typically by assigning invoices to a finance provider that advances a large share of face value and often runs collections. Debt collection is instructing an agency to chase a specific unpaid commercial invoice for a fee or commission, usually without buying the debt. They solve different problems: cashflow funding versus recovering a stuck B2B file.
This guide is not tax, finance or legal advice. Product names differ between providers; check the live facility terms and take advice before you assign invoices or instruct anyone. Primary reading: HMRC VATFIN3220 (factoring), VATFIN3255 (debt collection), and the British Business Bank invoice finance overview.
Debt Collection UK (a trading style of PASECOM GROUP LTD) introduces B2B files to independent partner agencies. We are not solicitors, we are not authorised by the Financial Conduct Authority, and we do not collect consumer credit. PASECOM GROUP LTD was incorporated on 7 April 2026. We introduce commercial claims; we do not issue proceedings. Partners collect. Recovery is not guaranteed. Debtor must be a Ltd, LLP or PLC. Creditor may be a sole trader.
For the collection route itself, see unpaid invoices and business debt collection. Related hub reading: VAT bad debt relief and no collection, no fee explained.
Short comparison
| Invoice factoring / discounting | Debt collection agency | |
|---|---|---|
| Main job | Advance cash against invoices; often run the ledger | Chase payment of an unpaid commercial debt |
| Typical structure | Assignment / purchase of debts (see VATFIN3220) | Agency acts for you; usually no assignment (VATFIN3255) |
| Customer awareness | Often disclosed (factoring); discounting may be confidential | Debtor usually learns a partner is chasing |
| Best fit | Ongoing B2B sales needing working capital | One or more overdue invoices that will not clear |
| Cost shape | Discount / finance charges + service fees | Commission / fixed percentage of what is recovered |
Figures such as “up to 90% advances” in public guides are illustrations from lenders and banks — not offers from this site. Always verify with a regulated finance provider if you need a facility.
What invoice factoring and invoice discounting are
HMRC VATFIN3220 describes factoring as services involving debt assignment (often called the purchase of debts). A factor may offer some mix of: an upfront advance (HMRC notes a typical illustration around 80% of face value), sales-ledger administration, credit information, and recovery action. Product labels vary: full-service / non-recourse, recourse, maturity, agency factoring, and invoice discounting (often confidential / undisclosed).
The British Business Bank summarises the market distinction many SMEs meet in practice:
- Factoring — provider advances against invoices, manages the sales ledger, and is involved in collecting; customers are likely to know you use a factor.
- Invoice discounting — finance against invoices while you keep day-to-day ledger and collection control; facilities are often undisclosed.
Business Wales adds practical fit checks: commercial (not consumer) sales, a spread of customers, and lower volumes of heavily aged debt. Factoring is unsuitable for many retail-to-consumer ledgers.
Recourse versus non-recourse (again from VATFIN3220): under recourse, unpaid debts can be reassigned back to you; under non-recourse, the factor bears loss in defined circumstances if the debtor defaults — subject to the facility wording. Do not treat marketing labels as bad-debt insurance without reading the agreement.
What a debt collection agency does
HMRC VATFIN3255 describes a debt collection agency as attempting to collect payments on behalf of creditors. Typically the agency does not take assignment of the debt. It charges a fee or commission on amounts recovered; uncollected debts are returned. Contact is usually letter, then phone and other channels. Commercial and consumer books are different markets — this site only introduces B2B Ltd / LLP / PLC debtors.
The fee is 15% of what is recovered, payable only when you have been paid. Marketing on this site describes 15% only when the client is paid. Recovery is not guaranteed. The fee is 15% of what is recovered, payable only when you have been paid.
You keep ownership of the claim (unless you separately assign it). That matters for court strategy, Late Payment of Commercial Debts interest and fixed compensation, and for VAT bad debt relief if you still hold the debt and meet Notice 700/18 conditions — see our VAT bad debt relief hub guide. Absolute assignment / factoring can affect relief while the debt is assigned (Notice paragraph on factored debts); confirm with your accountant.
When factoring (or discounting) usually fits better
Choose invoice finance when the problem is working capital on a live ledger, not a single stubborn invoice:
- You raise many B2B invoices on 30–90 day terms and need advances to pay staff or suppliers.
- You want (or accept) a provider running credit control across the book.
- Aged debt is not already dominant — many factors restrict heavily overdue invoices.
- You are willing to disclose a factor to customers, or you qualify for confidential discounting.
Factoring does not replace credit control discipline. Disputed, complex or contractual debts are often excluded or clawed back. It is a finance product — shop facilities carefully and take advice on security, covenants and customer notification.
When debt collection usually fits better
Instruct a collection partner when the problem is one (or a short list of) overdue commercial invoices that internal chasing has not cleared:
- Proof of debt is ready (invoice, contract, PO, delivery evidence) — see proof of debt documents.
- The debtor is a UK Ltd, LLP or PLC and the file is not a genuine dispute that needs negotiation first — see disputed commercial invoices.
- You want commission-only economics on what is recovered rather than a standing finance line.
- You do not want to assign the whole ledger or notify every customer of a factor.
A calm sequence: confirm entity and paperwork → assert Late Payment Act figures where the contract qualifies → send a Practice Direction letter before action → if still unpaid and undisputed, instruct via business debt collection or decide on a court claim yourself. For older balances, see aged debt over 90 days.
Can you use both?
Sometimes. Businesses use invoice finance for the healthy ledger and still need collection (or legal) routes for excluded, reassigned-back, or pre-facility aged invoices. If a debt has been absolutely assigned to a factor, the factor — not you — usually controls recovery until any reassignment. If you claimed or planned VAT bad debt relief, check how assignment and later recovery interact with box 4 / repayment rules before you move the file.
Do not assume a factor and a collection agency will chase the same invoice at once without clear ownership. Duplicate chasing damages leverage and can confuse the debtor.
A practical decision checklist
- Is the need cash against the ledger or recovery of a specific unpaid invoice?
- Will assignment / customer notification be acceptable?
- Is the debt disputed, retention-heavy, or consumer? (Consumer is out of scope for this site.)
- Have you kept a credit-control trail that supports Late Payment Act interest and compensation?
- If VAT was accounted for on the supply, have you diary’d Notice 700/18 timing separately from the cash chase?
Frequently asked questions
Is factoring the same as hiring a debt collector? No. Factoring is invoice finance that usually involves assigning debts and often running the ledger (VATFIN3220). A collection agency typically chases for commission without buying the debt (VATFIN3255).
Does invoice discounting tell my customers I borrowed against their invoices? Often not — many discounting facilities are confidential. Factoring is more often disclosed. Confirm disclosure rules in the facility.
Will a factor take every unpaid invoice, including 90+ day debts? Usually not. Public guidance (for example Business Wales) notes that high levels of debt over about 90 days can make you a poor fit. Aged files may need collection or legal routes instead.
If I instruct Debt Collection UK, do you buy my invoices? No. We introduce B2B claims to partner agencies. Partners collect; the fee is 15% of what is recovered, payable only when you have been paid. We do not provide invoice finance facilities.
What does instructing through this site cost? The fee is 15% of what is recovered, payable only when you have been paid. Recovery is not guaranteed.
Can I still claim VAT bad debt relief if I factor? Assignment and factoring can affect entitlement and timing under Notice 700/18. This is not tax advice — check the Notice and your accountant before you assign or claim.
When an unpaid commercial invoice is draining cash, decide whether you need a finance line on the ledger or a partner to chase that file. Upload the Ltd, LLP or PLC debt via unpaid invoices if you want collection, not factoring. The fee is 15% of what is recovered, payable only when you have been paid. Recovery is not guaranteed.