How invoice factoring can solve business cash flow problems
Invoice factoring is an outsourcing solution that allows businesses to improve cash flow by converting unpaid invoices sitting on the balance sheet in to money in the bank.
The cash flow problem
Many businesses are too busy selling and underestimate the back-office systems and resources needed to manage collecting payment for invoices.
The balance sheet looks healthy because plenty of sales are going out of the door – but cash is not coming in because of slow paying customers sitting on their invoices.
Sooner or later the business will run out of cash because money is going out on raw materials, stock, running costs and wages but is not flowing back the other way for business completed.
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Read our guide to learn more about factoring >>
Looking for a solution
The first stop for a business with cash flow issues is the bank for an overdraft – but this cash injection won’t work if the systems are not in place to solve the debt problems.
Without the better systems, all an overdraft does is literally give the business borrowed time by deferring the problem.
An alternative is invoice factoring. Factoring companies are often independent companies or bank or finance house subsidiaries.
How does invoice factoring work?
Rather than give you access to cash and let you carry on with same business habits that meant you had to borrow in the first place, factoring offers a longer-term solution.
Your business carries on working the same way – but instead of invoices sitting on your balance sheet, a factoring company takes over the management of your sales ledger.
You complete a sale and send an invoice to the customer and a copy to the factoring company.
They pay percentage of the invoice to your business within an agreed period – generally up to 80 -90% of the invoice often within as short a time as 24 hours.
The factoring company then collects the outstanding payment from the customer.
A service charge and some interest on the money already paid to your business are deducted from the customer’s payment and the balance goes in to your bank account.
Benefits of invoice factoring
Invoice factoring can bring several benefits to a business, including:
- Receiving a more or less immediate prepayment of every invoice issued
- No investment in staff and systems – the factoring company becomes your sales ledger back office
- Business managers can concentrate on growing sales rather than administrative issues.
- Lending is not secured against personal or business assets
Can invoice factoring help my business?
If you are a business-to-business trader offering credit terms to your customers, then factoring is a solution to consider.
Before agreeing terms, the factoring company will want to review your business to make sure factoring invoices is a suitable solution to your cash flow problems.
The basic criteria are:
- Your business is UK based
- Projected annual turnover is £50,000 or more
- Invoices are issued with between 30 and 90 days credit
Why use Touch?
Our aim at Touch is simple, to save you time and money by putting you in touch with the right lender.
No-obligation quotes are available through our quick and easy to use online quote form. We also have a dedicated team of factoring experts on hand to take your call should you need any more information or advice.
How much cash could you release from your unpaid invoices? Compare quotes online >>
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