Factoring is a type of finance designed to help businesses who issue invoices to customers. It enables companies to selltheir invoices for an advance payment on the day they are created, rather than waiting 30 days or more.
Waiting for payment for extended periods can lead to cash flow problems, whereas a factoring partner may advance up to 90% of the invoice value when it is issued. The balance, minus any fees, will follow when the customer pays.
Complete your work as you normally would to fulfil your customer’s order
Raise your invoiceas usual, and send it on to your customer
Send a copy to your factoring partner. They will process it and verify with your customer
Receive up to 90% of the invoice valuedirectly into your bank account, usually within 24 hours
Your customer pays the factoring provider. They pay when the invoice is due rather than paying you directly
The factoring company will forward the balance to you less any prearranged fees
Your provider will collect payments directly from your customers. You won’t need to chase the people who owe you money – the company providing the factoring service will carry out this work on your behalf. This is ideal if you don’t have an expert credit management team in-house.
Some providers will also allow you to keep your own credit control process. This is an arrangement known as CHOCS.
With so many options to choose from, finding the right provider can feel daunting – particularly if you are a small business with relatively little experience in this area. But our job here at Touch Financial is to help you compare products and invoice factoring companies to settle on an agreement that works perfectly for you and your customers.
Who is invoice factoring suitable for?
If you want to sell your invoices to a third party factor, you need to be a business-to-business (B2B) operation, selling to established businesses. You will need to be issuing invoices to your customers.
Factoring is suitable for firms that are issuing invoices with 30-90 day payment terms or sometimes longer.
Invoice factoring is used by over 40,000 UK companies throughout the UK. This service can be suitable for invoice amounts from a few hundred pounds to multiple millions, so it really is suitable for small organisations to large corporations alike.
Providers all have different rules for the types of business they work with. However, most will expect you to have been trading at least 12 months.
Most will also require you have a net turnover in excess of £50,000.
We assist businesses from a wide variety of sectors with their invoice factoring requirements every day, including:
As with all finance products, there are pros and cons attached to invoice factoring. Many of the advantages of factoring are immediately obvious – but before you make any big decisions regarding your company finances, it’s always wise to explore all the facts.
Advantages of factoring
Factoring enables you to improve your working capital to keep your business moving smoothly. While invoice factoring won’t eliminate bad debt, it should improve cash flow by reducing your working capital cycle by 20 days or more.
Your factoring provider will take control of credit management, which means your staff’s time can be spent more profitably elsewhere. Many company owners use factoring to help them regain control of other areas of their business.
Without concerns over when money is going to come in, you can extend your customer’s payment terms. This can help you improve existing relationships and increase your chances of winning – and keeping – new business.
With an invoice factoring facility, the majority of your sales ledger can be paid within 24 hours. And as we all know, access to fast cash is very important for most businesses.
Knowing your finances are in hand will give you invaluable peace of mind. With cash in the bank, you can now focus on the areas of your business that you want to grow or improve.
The risk of non-payment is low for the funder, as all customers are credit checked. Additionally, they can also be insured.
Some invoicefactoring companies don’t require an extensive trading history to help you with funding. Your customer’s creditworthiness is sometimes more important. If you’re a growing business, this can be a real advantage.
Disadvantages of factoring
Funders will need assurance that the arrangement is low risk. They will check to make sure your customers pay reliably and on time. If your customer base is less credit worthy, you may need to consider different funding options.
Now that the factoring company is liaising with your customers, you have less control over your relationships and may lose opportunities to apply a personal touch to your communications. However, your provider’s credit control staff will always be courteous and diplomatic.
The calculator’s results are based on real prices paid by hundreds of recent Touch Financial customers. We update this tool every month to ensure it only displays current fees and rates.
A debenture is an agreement between you and the factoring provider. Debentures are public because they are lodged at Companies House. They provide security for the factoring provider. Not all factoring companies issue a debenture in all cases. Find out more about debentures.
Compare invoice factoring companies
Touch Financial is the UK’s largest invoice finance broker. Using a credit broker like us means you can take advantage of speaking with business experts for free, before committing to your chosen provider.
We have a hand-picked panel of over 25 of the UK’s top invoice factoring companies. After a conversation with our expert consultants, we will aim to match your business with up to three factoring providers, so you can speak to each one individually and gain an understanding of how they work and how much their services will cost.
Some of the things we will take into consideration include:
Your business size, sector, location and trading history
Your customers’ size, sector, location and trading history
The nature of your work
The size and frequency of your invoices
You are under no obligation whatsoever to purchase our services. At the very least, you’ll leave the process with a better understanding of the products that are available, and how much it might cost to enter into a factoring arrangement.
We have a panel of over 25 hand-picked funders and we are confident we will be able to help you in selecting the right one for your business needs.
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