Stay informed with free updates
Simply sign up to the UK banks myFT Digest — delivered directly to your inbox.
Lloyds Banking Group is shutting an invoice financing service for small business customers as the UK’s biggest lenders pivot to focus on more lucrative corporate clients.
The UK’s biggest high street bank will close its invoice factoring service by the end of the year, according to two people familiar with the matter, in a blow to small enterprise customers operating on thin margins.
The move to end the service, under which Lloyds buys unpaid invoices from small businesses in return for the right to receive the payments from their customers, follows similar closures by other top lenders.
It comes as businesses confront rising costs after increases in the minimum wage and successive tax-raising budgets by chancellor Rachel Reeves.
“As cost pressures rise across employment, business rates and energy — and as interest rates fall — banks should take a more generous position to help small business owners access working capital,” said Craig Beaumont, executive director at the Federation of Small Businesses.
Invoice factoring is the process of selling outstanding customer invoices to a bank or finance firm at a discount in return for cash upfront. The service is generally used by smaller companies to smooth their cash flow and free up resources by outsourcing payment collection to an external agent.
Banks had initially moved into factoring in the hope of drawing small business customers and then cross-selling other more lucrative products.
But running a factoring business profitably can be difficult as it tends to be used by small and medium-sized enterprises, which do not generate significant profits for banks, while cross-selling has been limited, according to people in the industry.
Lloyds, which says its corporate purpose is “helping Britain prosper”, is the latest of the UK’s big four lenders to scale back its SME factoring as the banks focus on larger, more profitable corporate clients.
NatWest and Barclays closed their factoring businesses several years ago, according to people familiar with the matter. Meanwhile HSBC tightened its criteria for the service, limiting it to customers with more than £1mn in annual turnover.
Many small businesses rely on invoice financing products because of a wider problem with late payment by suppliers, said Beaumont.
Nathaniel Southworth, managing director of the North Yorkshire toy distributor KAP Toys, said he had used factoring facilities from several high street banks but that over the years lenders have imposed more stringent criteria around revenues and profits, which excluded firms like his.
“The mindset of traditional banks is that they would like a company’s finances to be nice, uniform and easily predictable,” he said. “I would love that to be the case as well. But the reality of business is it’s quite rarely like that and I think sometimes smaller businesses can feel shut out.”
Lloyds declined to comment. One person close to the bank said the invoice factoring division was modest in size and that Lloyds would continue to provide other similar services to customers to ensure they would not face significant disruption. The person added that the bank was growing its SME lending business and that its factoring products were used by less than 1 per cent of its SME customers.
HSBC said it was “committed to supporting small businesses . . . including helping them access the most cost-effective lending products for their needs”.
A person close to Barclays said the bank continued to offer other invoice financing services. A person close to NatWest said that its factoring unit had fewer than 1,000 customers by the time it closed in 2021 because of falling demand.