Advantages & Disadvantages of Small Business Factoring

One of the biggest issues which small businesses face is the control of cash flow – and this can be a key Factor in whether a business is able to grow or even survive.

In the current economic climate banks are reluctant to lend to businesses, particularly SMEs and those without a long financial track record to demonstrate their stability. Many are looking for alternative ways to ensure there is always enough money in the bank to pay suppliers and staff, buy new stock and meet all the other overheads which running a business entails.

Small Business Factoring is one of the most popular methods of achieving this and one which is gaining more and more popularity with businesses in virtually every sector.

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How small Business Factoring works

In its simplest terms, small Business Factoring involves a company selling its outstanding invoices to a Factor who will give the company up to 95% of their value straight away.

It then becomes the Factor’s responsibility to pursue full payment of each invoice from the company’s customers. As each one is settled, the Factor pays the outstanding balance minus the fee and interest charges it makes for each invoice.

When looking for potential Factors to get a quotation it can be a good idea to go via an independent broker like Touch Financial who can give you a range of options free of charge.

The advantages of Factoring

There are a wide range of reasons why small Business Factoring can be a sound financial decision.

  • Improved cash flow. Because payment will be made by the Factor within 24 hours of receiving an invoice it will give almost immediate access to cash which might otherwise take up to 60 days to receive.
  • Saves time Because responsibility for billing and chasing payment is taken by the Factor it frees time which the small business can spend more profitably servicing existing clients or pursuing new ones.
  • Creates greater financial stability Long term debts are avoided. A Factor will also probably look into the financial security of customers and bring to attention any which might present a risk.
  • Helps to focus on financial planning Because a business will have to keep a close eye on money owed each month it can help it to concentrate on financial efficiency.

. . . and the disadvantages

Like everything, small Business Factoring does have a few disadvantages which should be taken into consideration before embarking on it for your company.

  • Reduces profits The fees and interest paid to the Factor will inevitably reduce the profit margin. Although if the Factoring company manage the process of collecting payments, credit control etc. You could actually end up saving money as you don’t require headcount and expensive management systems to manage this process.
  • Potential change in business practices A Factor may insist on a business changing the way they work and even recommend that they stop dealing with certain customers. This highlights the importance of ensuring you work with a lender which understands your business and can help it grow.
  • Change in customer relationships The Factor will be the company controlling the financial dealings with customers and that may affect the supplier/client relationship. That said some businesses in the UK like this process as it distances the ‘cut-throat’ payment collection process from the people doing the business.
  • It’s a long term commitment Some Factors have a long notice period for companies wishing to terminate the arrangement. Which again highlights the importance of working with the right lender straight off the bat. There are also a couple of lenders which offer a ‘trial service’ allowing customers to terminate the facility within the first 28 days.

While there are no hard and fast rules about the suitability of Factoring for your company, however you could be suitable for Factoring if you answer yes to these questions:

  • Is your turnover £50,000 or above?
  • Are your customers other businesses, not the general public?
  • Do you have more than just a few customers??

If it sounds like small Business Factoring could be a good solution for you contact Touch Financial today for a no obligation quotation. We have close links with all the UK’s leading Factors and can assure you of a very competitive price.

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