Invoice factoring is a type of finance, which involves selling the accounts receivable to a factoring company. The invoice financing company provides debtor finance, so that a business has access to cash owed via invoices. This form of invoice finance is essentially a short-term loan, which releases cash owed to a business for services or goods.
This type of invoicing finance is also referred to as debt factoring. Although, both terms simply refer to packages designed to provide businesses which access to funds as soon as invoices are raised. The funds owed to your business can be released through asset based lending, so that you have access to working capital, instead of waiting for slow-paying customers.
If your business is struggling with cash flow due to unpaid invoices, factoring companies can help by releasing cash up to the invoice value. You continue to provide goods or services to your customers and raise invoices as usual. The invoice factoring company will then buy the debt which the customer owes your business, so that you can access a percentage of the funds owed within the invoice.
When factoring invoices, it is important to note that the factoring company will become responsible for chasing your customers for late payments. When your customers pay their invoice, the money collected goes straight to the invoice finance company. They will remove the prearranged fee and interest amount, with any remaining balance transferred to your business.
Invoice factoring is an option for businesses which make short sales and have to wait long periods to see the return, including both asset based and non-asset based businesses. For example, recruitment agencies, construction companies and engineering businesses can provide a service or asset based product, yet they may have to wait several weeks for their customers to pay. Invoice factoring is also a popular option for businesses which need help with their credit control procedures. If your business is relatively new or has limited resources, a factoring company can take control of your credit control process. As a business they will become responsible for chasing late payments of any overdue invoice. This can help improve cash flow and free up your time to concentrate on the core activities of your business.
The main difference between invoice factoring and invoice discounting is where the responsibility lies in chasing late payments. If you choose to improve your working capital via invoice factoring, you will no longer be in control of your sales ledger. Your customers will know that you are using this form of finance to access working capital, as the factoring company will contact them to chase unpaid invoices. Many businesses who use invoice finance benefit from the administrative support when the factoring company takes over credit control.
There are no more awkward conversations with customers who make late payments and your cash flow will improve. You may also find that working capital improves, as the invoice finance company may be able to negotiate better terms, for both asset based and non-asset based businesses. If you have robust credit control procedures in place and would like your invoice finance to remain confidential, invoice discounting may be a more suitable form of finance.
If you have strong relationships with your customers and would rather deal with them directly about matters relating to your working capital and cash flow, invoice discounting could be a better option. You will remain in control of your sales ledger, however all responsibility of chasing customers for unpaid invoices will fall to your business. If you pride yourself on your customer service levels and would like to retain contact with your customers at every stage, invoice discounting will still enable you to improve cash flow by increasing working capital.
Invoice finance is only available if your customers are businesses, so if your customers are members of the public you will not be eligible for factoring. The lender will want to look at your invoice book, as this will provide them with an overview of your customers. For your business to be given a high chance of approval, you will need to show that you have a good relationship with your customers. They should be willing and able to pay their invoices on time.
You will need to provide proof that late payments are minimal, as this will show the invoice factoring company that lending to you is low risk. If your business has a history of poor cash flow due to invoice late payments and poor credit control, you may struggle to find a factoring company. Those who have a sales ledger with a variety of customers who have a history of paying on time are more likely to be approved by a factoring company. However, if invoice finance is not the right option for your business, there are other forms of business finance which could help.
Yes, invoice finance including factoring can be used by those with both bad and perfect credit scores. If you have a history of late payments and have struggled to borrow from a traditional lender, a factoring company could still help. This is because the factoring company will assess the creditworthiness of your customers, rather than basing their decision solely on your business or personal credit history.
If you are a new business or a business with a poor credit history looking to improve working capital, factoring could actually improve your credit history. If you have existing debts which you are struggling to pay, the working capital provided through factoring could help you repay existing debts to improve credit standing.
Here in the UK, invoice factoring and other forms of invoice finance are well regulated. The Asset Based Finance Association (ABFA), was integrated into a new trade association known as UK Finance, designed to support and regulate the flexible business finance industry.
The Asset Based Finance Assocation developed an industry wide code of conduct, which is designed to ensure that integrity and fairness is offered by all factoring companies. If you are considering factoring as a type of invoice finance, membership is a sign you can trust the lender. The Financial Conduct Authority is another organisation which can assist with resolving disputes and complaints arising from a factoring contract.
If you are looking to unlock cash when you issue an invoice, factoring could be a great option for your business. Your cash flow will improve and you will no longer need to focus resources on credit control and late payments. If your business would like to retain control of bookkeeping and chasing unpaid invoices, invoice discounting may be a more suitable form of invoice finance.
We know how difficult it can be to find the ideal lender when your business needs quick access to cash flow, however we can help. Our team can help you compare more than 30 lenders which offer both invoice factoring and invoice discounting. If you decide that invoice finance is not the right option for your business, we can look into other ways to improve you cash flow such as business loans, credit cards and overdrafts.
Our aim is to help you compare the deals available, so that you choose the best form of finance for your business. To find out more about invoice factoring, invoice discounting or any other form of business lending, please contact our team today.