1. Cash-flow shock is coming – Lloyds Banking Group has closed its invoice factoring service by December 2025. Although only a small share of SMEs used it (under 1% of customers), those that did relied on a steady cash-flow lifeline.
2. You need a plan B – factoring typically provides 80–90% of invoice value up front but costs 1–5% of the invoice and includes service and discount fees. Without it, businesses must tighten payment terms, chase late payers sooner and consider alternative funding or legal enforcement.
3. Use the law to protect yourself – the UK’s statutory interest on late commercial payments is 8% plus the Bank of England base rate. Charging interest and issuing a formal “letter before action” can improve your leverage. CaseCraft.AI provides automated templates and small-claims support.
Lloyds Banking Group set to wind down its SME invoice-factoring service by the end of 2025, with closure scheduled around 30 April 2026, according to recent reports. The bank will migrate existing customers to its Invoice Finance Online platform as part of this transition. Fewer than 1% of SME clients currently use the factoring facility, and major UK lenders are increasingly retreating from hands-on working-capital products. These changes are part of a broader trend in the banking sector as institutions focus on higher-return, scalable services over resource-intensive products such as SME invoice factoring.
What Is Lloyds Changing?
- Closure and migration: Lloyds shot down its SME factoring and Cash Connect solutions by late 2025/April 2026 and transitioned customers to Invoice Finance Online. The new platform streamlines funding on the back of real-time ledger integration and a dedicated trust account, with client managers arranging transition support and account setup directly with customers.
- Scale and context: Fewer than 1% of SME clients use factoring. Banks are exiting this market because profits are modest and cross‑selling opportunities are limited.
What Invoice Factoring Is and Why SMEs Use It?
Invoice factoring is a short‑term funding arrangement in which a business sells invoices for immediate cash, typically 80–90% of their value. The factor collects payment from your customers and later returns the balance minus fees such as a service charge and a discount rate, plus any set‑up costs. Invoice discounting is a related product where you borrow against invoices while keeping control of collections; fees are lower (around 1–3%), but you must chase your customers yourself.
Why This Matters Now for Small Businesses?
Late payments are endemic. Overdue invoices cost the UK economy nearly £11 billion and contribute to the closure of about 14,000 firms a year. Two‑thirds of invoices are paid late, and 45% of SMEs report that the problem is getting worse.
Losing a source of invoice finance will make this cash‑flow squeeze more acute. Factoring fees of 1–5% buy you certainty; without them, you must bridge the gap or take legal action. Small claims courts cover disputes up to £10,000. To avoid court, strengthen credit control, chase debt promptly and know your rights.
If You Relied on Factoring: Your 7‑Day Action Checklist
Check your agreement: Review the notice period, any early‑termination fees and the migration plan to Invoice Finance Online.
Plan your cash flow: Forecast when funding stops, renegotiate payment dates with key customers and shorten terms for new work.
Consider alternatives: Compare invoice discounting (fees around 1–3%), overdrafts and short loans; borrow only to cover clear gaps.
Follow a reminder process: Send prompt reminders, then a late payment demand letter with statutory interest, and finally a letter before action, unpaid invoice. Document all communications and evidence in a “debt recovery checklist.”
Alternatives to Invoice Factoring (Quick, Non‑Salesy)
- Invoice discounting: Borrow against invoices while keeping control of collections. Fees are lower than factoring, and advance rates can reach 95%.
- Other credit options: Overdrafts, revolving credit, short loans and trade credit insurance can plug gaps but come with higher interest or premiums.
Invoice finance isn’t the only solution. Tighten terms, chase debt promptly and keep reserves to reduce reliance on borrowing.
The Legal Lever Many SMEs Underuse: Charging Interest on Late Payments?
UK law lets you charge statutory interest on late commercial payments. This rate is 8% above the Bank of England base rate unless your contract specifies another figure, and you can also claim a fixed sum for debt‑recovery costs. Adding these amounts to a demand letter quantifies the cost of delay and often prompts settlement. If the debtor still refuses to pay, issue a letter before action with a final deadline and, if necessary, file a small claim.
How CaseCraft.AI Helps?
CaseCraft.AI specialises in automating debt recovery for small businesses. It supports SME owners by:
- Generating compliant documents and guiding claims. The platform produces tailored reminders, late payment demand letters and letters before action, an unpaid invoice with statutory interest calculated. It also explains the small claim for the unpaid invoice process, providing templates and deadlines so you can file confidently. See our late payment demand letter and small claim for unpaid invoice guides.
- Organising evidence. CaseCraft.AI helps you build a timeline of emails, invoices and contracts, ensuring nothing is missed when negotiating or going to court. Explore our debt recovery checklist for more.
CaseCraft.AI is not a lender. Its value lies in enforcement and preparation, freeing you to focus on your core business while asserting your rights.
Next Steps
Lloyds’ withdrawal from invoice factoring is part of a broader retreat by banks from SME cash‑flow products. If you’re affected, line up alternative funding, tighten payment terms and respond quickly to late payers. Charge statutory interest where allowed, issue demand letters and be ready to make a small claim. CaseCraft.AI automates these steps so you can enforce your rights and protect cash flow without unnecessary stress.
FAQ
Is Lloyds ending invoice factoring or moving customers to a different platform?
Lloyds will close its SME invoice factoring service by December 2025/April 2026 and transfer clients to Invoice Finance Online, a platform with real‑time ledger integration and a dedicated trust account.
What’s the difference between invoice factoring and discounting?
Factoring means selling invoices to a provider, receiving about 80–90% up front and letting the provider chase payment. Discounting is a loan secured on your invoices; it’s cheaper (fees around 1–3 % plus interest), but you remain responsible for collecting from customers.
How should I handle a consistently late customer?
Send prompt reminders, then issue a late payment demand letter calculating statutory interest and compensation. If payment is still withheld, send a final letter before taking action unpaid invoice and prepare a small claim. CaseCraft.AI can generate these documents for you.
Can I charge interest on late commercial payments in the UK?
Yes. Unless your contract states otherwise, you can charge statutory interest at 8% above the Bank of England base rate and claim a fixed sum to cover recovery costs.
