Okay so most people have never heard of factoring invoices and unless they trade business-to-business, they may never be able to take advantage of this form of finance. For the rest of you, here’s how factoring works.
“Factoring gives your company the working capital it needs to grow, but unlike traditional finance, credit lines in factoring grow with your customer base.”
Here’s how invoice factoring helps businesses with cashflow
How many times have you had to wait 30, 60 or even 90 days for customers to settle invoices? Small businesses like yours are often happy to wait a little longer than usual for payment, especially when taking on larger customers. In the meantime, you still have wages to pay and bills to settle.
Bigger customers are great for larger contracts, but the downsides are:
- Longer terms for payment
- Low leverage because of high income concentration (too many eggs in one basket)
- They limit your ability to service smaller customers because of finite resources.
Waiting for invoice payment puts unnecessary strain on businesses – Fact.
When using invoice factoring, you raise an invoice today and get paid within 24 hours
Here is a quick breakdown of how it all works:
- Invoice your customer
- Send the details to your chosen funder
- Funder releases up to 90% of your total invoice value within 24 hours
- Funder manages credit control/collection from your customer
- Customer settles full amount of invoice
- Funder releases the remaining value of your invoice minus agreed fees
Why Not Use a Business Loan?
Applying for a commercial loan is a drawn out process that diverts company resources and often leads to disappointment. Any form of mainstream lending through high-street banks requires a business plan and you may even need to supply security or collateral.
Factoring, on the other hand, has become the go-to alternative for mainstream funders. All factoring companies require is a paper trail or a history of invoicing reliable companies. The focus is primarily on the strength of your customers.
Key Advantages of Factoring
- Unlimited Growth
Factoring offers a funding limit that grows with your company’s sales and the fees are a percentage of the amount invoice so if your companies doing well, you pay more but if your company has a seasonal lull in sales, your fees will be less.
Another big draw to factoring is the speed at which you can acquire funding. It is typical for a company in a facility to receive up to 90% of the invoice value within one day of issue. Funders release the rest, minus fees on the day the invoice is settled.
The terms of a factoring facility are configurable to your company’s individual requirements. Factoring is not dependent on your credit rating. This makes it a useful source of funding for start-ups and companies that suffer from adverse credit. Effectively, if you can show your factoring company a contract with a half-decent customer, they will fund your venture.
Bolt-on features you can add to your facility such as:
- Bad debt protection to provide insurance if a debtor becomes insolvent.
- An outsourced credit control and accounts receivable function.
- A back-office solution to automate your payroll.
Benefits of Factoring
Having the cash flow so readily available could help your company:
- Widen the scope and size of the projects you take on.
- Hire more staff.
- Retain the best staff.
- Invest in new premises.
- Invest in new equipment.
- Invest in IT.
- Cope with unexpected events.
- Bulk-buy materials and come to better terms with suppliers.