Invoice factoring, the most popular form of invoice finance, is a method of lending designed to help businesses who rely on payment from customers via invoice.
Payment terms on invoices can range anywhere from 30 to 120 days, which can lead to cash flow problems. Turning to banks for an overdraft or business loan to cover payment gaps is sometimes problematic for smaller businesses without a perfect credit score – that’s where invoice factoring comes in, solving those potential cash flow issues before they arise.
How does it work?
- Firstly, you raise your invoice with your customer, containing the usual information such as how much payment is required and within how many days.
- Next, send a copy of this invoice to your factoring provider and they will pay you the pre-arranged percentage of the invoice within 24 hours. This can be up to 100% of the total amount.
- Hooray! You now have available cash to cover the costs of your business and can get back to running things.
- The final step is for the factoring company to receive the full payment of the invoice from your customer and send over the remaining value to you, minus a pre-arranged fee.
During the process of factoring, a third party will be collecting payment directly from your customers so it is likely they will be aware of the factoring arrangement. If you’d prefer to minimise this awareness, take a look at invoice discounting where your customers pay into a trust account in your company’s name that is set up by the financier.
You still have the option here to keep your own credit control or let the financier take it on. The latter can be very beneficial as it will allow you to keep focus on running day to day operations rather than losing time chasing payments.
Advantages and disadvantages of factoring
As with anything, there are pros and cons attached to invoice factoring. Many of the benefits are immediately obvious, but before making any big decisions regarding finances, it’s always wise to explore all the facts.
What are the costs involved?
The concept of invoice factoring is essentially selling on your invoices at a rate slightly less than they are worth, which means the financier receives a fee for advancing the cash value to you. Any additional fees you pay will vary depending on the funding company and your agreement with them.
Invoice factoring companies tend to be best suited for small to medium firms with at least £50,000 (plus VAT) turnover. The invoice value you require to be advanced by the lender can vary depending on the size of your business. Our invoice finance calculator provides fairly close estimates as to how much a facility may cost your business.
Compare invoice factoring companies
Touch is the UK’s largest invoice finance broker and we have a hand-picked panel of over 35 of the top funders in the country. After a conversation with one of our expert consultants, you’ll be matched with up to three lenders who most appropriately suit your business needs.
The reason we compare invoice factoring funders is that invoice finance is not a one-size-fits-all solution. We need to identify which ones will be suitable for your specific business, as some lenders may only work within specific sectors such as construction, others only within the recruitment sector. A funder specialising in recruitment finance is not going to be suitable for you if you’re seeking finance for your retail business.
The fees and rates also vary between funders so this is another thing to be taken into consideration when comparing. That’s where we can help as we compare all these funders based on the information you give us about your business.
The most likely fees to crop up are a service fee, as a percentage of your turnover, and a discount fee, which is the cost of borrowing.
We’ll help you compare factoring companies…
Invoice factoring might not be the best option for you, so there are other avenues to explore when it comes to financing your business. Consider spot factoring if you have a single pending invoice of a large, significant amount, or an unsecured business loan if you are a small or new business that has been trading for a minimum of twelve months.
Armed with these facts about invoice factoring and how it could help your business, get in touch now by filling in our form to hear from our expert consultants and let us help find the best facility for your business needs.
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